Technical Guide on Accounting for Not-for-Profit Organisations(NPO's) Celebrating the 60th Year of Excellence The Institute of Chartered Accountants

of India (Set up by an Act of Parliament) New Delhi

Technical Guide on Accounting for Not-for-Profit Organisations Research Committee THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA NEW DELHI

 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA All rights reserved. No part of this publication may be translated, reprinted or reproduced or utilised in any f orm either in whole or in part or by any electronic, mechanical or other means, including photocopying and recording, or in any information storage and retrieva l system, without prior permission in writing from the publisher. Published in 2009 Price : Rs. 150/Committee/ Department : Research Committee ISBN : 978-81-8441-276-5 Published by : The Publication Department on behalf of The Institute of Chartered Accountants of India, ICAI Bhawan, Indraprastha Marg, New Delhi-110 002, India : Sahitya Bh awan Publications, Hospital Road, Agra- 282 003 October/2009/2000 Copies Printed at

Foreword Not-for-Profit Organisations (NPOs) include large international charities as wel l as small community-based self-help groups. NPOs may be in form of a corporatio n, a trust, a co-operative, or a foundation. There is an apparent lack of awaren ess among NPOs on applicability of Accounting Standards to such organisations. L arge number of unregistered NPOs exist in India, which follow different basis of accounting. In order to provide clarity of accounting treatment to be followed in case of various types of transactions carried out by NPOs as well as to impar t uniformity in the diverse accounting practices, the Research Committee of the Institute had published the Technical Guide on Accounting and Auditing in Notfor -Profit Organisations in 2003 which was subsequently revised by the Committee in 2006. The Technical Guide has been acclaimed as an important landmark in improv ing accounting in the NPO sector. The Technical Guide has now been again revised by the Research Committee to bring about a greater focus to accounting issues i n NPOs, including updation of various accounting treatments in view of developme nts subsequent to the last edition of the publication. The revised edition is be ing published as Technical Guide on Accounting in Not-for-Profit Organisations'. I congratulate Shri Harinderjit Singh, Chairman, Research Committee and other memb ers of the Research Committee for their invaluable contribution in the revision of this Technical Guide. I hope that this endeavour of the Research Committee wi ll go a long way in establishing sound accounting practices and provide guidance to the members as well as to the others concerned. New Delhi August 26, 2009 CA. Uttam Prakash Aggarwal President

Preface Not-for-Profit Organisations (NPOs) are important for the development of a count ry as are for-profit organisations. In India, NPOs operate in varied fields such as health, poverty reduction, education, etc., and act as effective movers in s ocio-economic change of the country. Bearing in mind the important role of NPOs and with the objective of ensuring accountability and transparency for NPOs and their operations, the Research Committee of the Institute, in 2003, brought out the Technical Guide on Accounting and Auditing in Not-for-Profit Organisations t o suggest an accounting and financial reporting framework for NPOs. The Technica l Guide not only facilitated in making NPOs accountable for their activities but also in standardising the accounting practices followed by diverse NPOs based o n the accrual system of accounting. As a result, in 2006, the Technical Guide wa s revised on the basis of the feedback received from various users of the Techni cal Guide and the participants in various conferences and workshops. Revisions w ere also made to incorporate revisions in existing Accounting Standards/issuance of new Accounting Standards since the issuance of the first edition of the Tech nical Guide. In both editions of the Technical Guide, salient features and princ ipal requirements of all the Accounting Standards formulated by the Institute of Chartered Accountants of India were discussed, followed by the issues which may arise in the course of application of these Standards by NPOs. However, given t hat some of the Accounting Standards may not be relevant to NPOs, and with a vie w to provide focused guidance on specific accounting issues of NPOs, the Researc h Committee decided to revise the Technical Guide. Accordingly, the Committee ha s brought out this Technical Guide on Accounting for Not-for-Profit Organisation s (NPOs), explaining the accounting of key elements of the financial

statements income, expenses, assets and liabilities, in the context of NPOs, in accordance with the Accounting Standards relevant to NPOs. On behalf of the Rese arch Committee, I would like to place on record my deep appreciation to CA. Rozm in Ajani, an expert in the area of accounting in the NPO sector, for preparing t he basic draft of this revised Technical Guide. I trust that this revised editio n of the Technical Guide will further aid in establishing sound accounting and r eporting system in the NPO sector and will be immensely helpful to members and o thers concerned. New Delhi August 25, 2009 CA. Harinderjit Singh Chairman Research Committee

Contents Foreword Preface INTRODUCTION OBJECTIVE SCOPE DEFINITIONS ACCOUNTING FRAMEWORK F OR NPOs BASIS OF ACCOUNTING ACCOUNTING STANDARDS Applicability of Accounting Sta ndards to NPOs RECOGNITION AND MEASUREMENT PRINCIPLES Income Expenses Assets Lia bilities Provisions 1 6 6 7 9 12 14 15 19 19 26 33 44 45

BOOKS OF ACCOUNT TO BE MAINTAINED BY NPOs FORMATS OF FINANCIAL STATEMENTS FUND B ASED ACCOUNTING DISCLOSURES TRANSITION TO ACCRUAL BASIS OF ACCOUNTING Appendix I Illustrative Formats for Financial Statements Appendix II Applicability of Acco unting Standards 47 48 51 55 64 66 84

Accounting for Non-for-Profit Organisations INTRODUCTION 1. Voluntary effort has always been an integral part of Indian culture and socia l tradition. In a societal context, voluntary organisations constitute the third sector, the first sector being the government and the second sector being the market or private business. The third sector is also known as the independent sector, empha sising the important role voluntary organisations play as an independent force o utside the realm of government and private business though, in financial terms, this sector depends heavily on both the government and private business. 2. Some voluntary organisations are called Non-Government Organisations (NGOs). This is , once again, to emphasise that the organisation is not controlled by the govern ment or any other outside agency. Other synonyms used to describe these organisa tions include Private Voluntary Organisations, Non-Profit Organisations and Civi l Service Organisations. The terminology used in the Technical Guide is Not-forProfit Organisations (NPOs). 3. The World Bank defines NPOs as private organisati ons that pursue activities to relieve suffering, promote the interests of the po or, protect the environment, provide basic social services, or undertake communi ty development. The World Bank further classifies operational NPOs into three mai n groups: (a) Community Based Organisations (CBOs) these serve a specific popula tion in a narrow geographical area in individual developing countries. National Organisations these operate in developing countries. International Organisations these are typically headquartered in developed countries and carry out operatio ns in more than one developing country. (b) (c) 1

Accounting for Non-for-Profit Organisations 4. The term NPO is thus very broad and encompasses many different types of organ isations. Further, NPOs range from large international charities, to community-b ased self-help groups. Certain research institutes and professional associations also operate as NPOs. 5. Some common factors that characterise NPOs are as foll ows: (a) Formal, i.e., institutionalised to some extent if not registered, at le ast having a definite programme or aims and objects, as also rules and regulatio ns of governance Private, i.e., not part of the apparatus of the State, even tho ugh they may receive support from government sources Self-governing, i.e., havin g their own mechanisms for internal governance, ability to cease operations on t heir own authority, and fundamentally in control of their own affairs Not-for-pr ofit, i.e., not primarily commercial in purpose and not distributing profits to a set of directors, stockholders, or managers Voluntary, i.e., involving some me aningful degree of voluntary participation, either in the actual conduct of the organisation's activities or in the management of its affairs Non-religious, i.e., not primarily involved in the promotion of religious worship or religious educa tion this automatically excludes temples, churches, synagogues, mosques, religio us congregations, where religious worship takes place, but includes all not-forprofit service organisations affiliated to religious institutions, e.g., schools run by the Arya Samaj or Christian missionaries, etc. 2 (b) (c) (d) (e) (f)

Accounting for Non-for-Profit Organisations (g) Non-political, i.e., not primarily involved in promoting candidates for elected office, etc. 6. There are certain features that distinguish NPOs from forprofit' organisations. These include: (a) Organisational objectives: The basic difference between for-pr ofit' organisations and NPOs is that the latter do not operate primarily for profi t but to serve the specific needs of a community, group, organisation or its mem bership. On the contrary, the dominant purpose, or at least one of the major pur poses of commercial or for-profit' organisations, is earning profits. Profits defin e their very purpose of existence. Difficulty in performance measurement: The ce ntral problem in measuring performance in NPOs is that service' is a less measurabl e component than profit'. It, thus, follows that it is more difficult to measure pe rformance in an NPO than in a for-profit' organisation. Thus, other indicators for performance measurement are needed for this sector. Non-transferable ownership: In NPOs, whether registered as societies, trusts or under any other statute, the members or contributors do not possess ownership interests that can be sold, tr ansferred or redeemed or that convey entitlement of a share of a residual distri bution of resources in the event of liquidation of the organisation. Funding: A unique characteristic of the NPO sector is that significant amounts of resources are received from resource providers who do not expect to receive either repaym ent or economic benefit proportionate to the resources provided. Volunteerism: A typical and most outstanding feature of the NPO sector is the extent of volunta ry services 3 (b) (c) (d) (e)

Accounting for Non-for-Profit Organisations that are contributed to such organisations. The term volunteer' not only includes t he innumerable unpaid trustees, patrons and members of NPOs, but also millions m ore who help in some form or the other and perhaps less noticeably. The value of their contribution may not be financially quantifiable, but the extent of their influence at the grassroots level is undeniable. Earlier voluntary organisation s were started and managed mostly by people of goodwill who did not necessarily have professional qualifications or competence. But today, professionals and exp erts from diverse fields are associated with this sector. Harnessing the power o f the volunteer to deliver otherwise uneconomic services and maintaining enthusi astic volunteer support is a challenge to the NPO sector. (f) Diversity in activ ities and size: NPOs are of all sizes, ideologies, nationalities, organisational structures and styles. NPOs encompass everything from charities and relief agen cies to social movements for human rights; think tanks and academic centres to c ommunity organisations; cultural associations to continent wide farmers' networks and women's groups to environmental federations. 7. With regard to accounting, there exists in NPOs diversity in accounting pract ices which is due to the following factors: (a) Existence of a large number of u nregistered NPOs: Large numbers of NPOs in India are small in size and are not r egistered under any statute. These NPOs carry out diverse types of activities su ch as educational, developmental and cultural. No authentic information is avail able about the accounting practices being followed by these unregistered NPOs. L ack of awareness on applicability of accounting standards: There is lack of awar eness among NPOs on the benefits of adopting sound accounting practices 4 (b)

Accounting for Non-for-Profit Organisations based on the generally accepted accounting principles, promulgated, inter alia, as Accounting Standards, in accounting for various transactions. There is also a lack of awareness on applicability of Accounting Standards formulated by the In stitute of Chartered Accountants of India to the sector. (c) Adoption of differe nt basis of accounting: Current accounting practices in the NPO sector reveal th at basis of accounting other than accrual are continued to be followed by many N POs. Influence of tax and other laws: The existing accounting practices in the N PO sector are generally driven by the requirements of the tax and other laws suc h as Foreign Contribution (Regulation) Act, 1976 rather than with a view to refl ect a true and fair view of the state of affairs and results of the activities c arried on by an NPO during the year. (d) 8. As a result of the above factors, the existing accounting practices in the NP O sector have the following characteristics: (a) There is no standard basis of a ccounting being followed by NPOs. Cash, hybrid, accrual, modified cash/accrual b asis of accounting are being followed. The Accounting Standards formulated by th e Institute of Chartered Accountants of India, are generally not being applied. There is lack of uniformity in presentation of financial statements. There are d ifferent disclosure practices being followed by individual NPOs. There is divers ity in terminology and accounting policies being adopted. 5 (b) (c) (d) (e)

Accounting for Non-for-Profit Organisations 9. In view of the above, information provided by the financial statements of dif ferent NPOs is not standard or comparable. This has given rise to confusion and misunderstanding among the users of financial information provided by NPOs. 10. A great need is, therefore, being felt for accountability of the financial resou rces used by the NPOs. A sound accounting and financial reporting framework acts as an important ingredient for promoting accountability of an organisation. It has, however, been found that the present system of accounting and financial rep orting followed by NPOs does not adequately meet the accountability concerns of the donor-agencies, including government and other stakeholders such as members/ beneficiaries, governing board, management staff, volunteers and general public. OBJECTIVE 11. The objective of this Technical Guide is to recommend, with a view to harmon ising the diverse accounting practices being followed across NPOs, a standardise d framework for the preparation and presentation of financial statements in NPOs . This includes the application of sound accounting principles pertaining to rec ognition, measurement and disclosure of various items of income and expenses, as sets and liabilities in the financial statements of NPOs keeping in view the pec uliarities of the activities of NPOs. SCOPE 12. This Technical Guide is applicable to all NPOs whether community based, nati onal or international, having their operations in India. 13. This Technical Guid e specifically excludes from its scope, Governmental Organisations and Municipal Corporations. 14. This Technical Guide focuses on presenting a standardised fra mework for preparation and presentation of financial statements 6

Accounting for Non-for-Profit Organisations in NPOs, using sound accounting principles pertaining to recognition, measuremen t and disclosures. Therefore, the requirements of various Acts including the Inc ome-tax Act and the Foreign Contribution (Regulation) Act, do not form part of t his Technical Guide. 15. For the purpose of this Technical Guide, the NPO is con sidered as the reporting entity. Therefore, if an NPO has different programmes, projects, branch offices, or sources of funds, for the sake of convenience and t ransparency it may maintain separate accounts for each such sub-entity. However, for the purpose of preparation of financial statements; the accounts for all pr ogrammes, projects, branch offices and sources of funding have to be consolidate d into that of the NPO as the reporting entity. 16. This Technical Guide is appl icable not only to the programme implementation activities but also to other inc idental activities including income generating activities carried on by NPOs. DEFINITIONS 17. For the purpose of this Technical Guide, the following terms are used with t he meanings specified: Accounting policies are the specific accounting principle s, bases, conventions, rules and practices adopted by NPOs in preparation and pr esentation of financial statements. Accrual basis means a basis of accounting un der which transactions and other events are recognised when they occur (and not only when cash or its equivalent is received or paid). Therefore, the transactio ns and events are recorded in the accounting records and recognised in the finan cial statements of the periods to which they relate. The elements recognised und er accrual accounting are assets, liabilities, revenue and expenses. Assets are resources controlled by an NPO as a result of past events and from which future economic benefits or service potential are expected to flow to the NPO. 7

Accounting for Non-for-Profit Organisations Corpus comprises non-reducible funds of capital nature, contributed by founders/ promoters of the NPO, not available for distribution during the existence of an NPO. Designated funds are unrestricted funds which have been set aside by the ma nagement of the NPOs for specific purposes or to meet specific future commitment s. Expenses are decreases in economic benefits or service potential during the a ccounting period in the form of outflows or depletion of assets or incurrences o f liabilities that result in decreases in the net assets of an NPO. Fair value i s the amount for which an asset could be exchanged or a liability could be settl ed between knowledgeable, willing parties in an arm's length transaction. Financia l statements include income and expenditure account, balance sheet, cash flow st atement (where applicable) and other statements and explanatory notes which form part thereof. Government grants are assistance by government in cash or kind to an NPO for past or future compliance with certain conditions. They exclude thos e forms of government assistance which cannot reasonably have a value placed upo n them and transactions with government which cannot be distinguished from norma l trading transactions of an NPO. Government refers to government, government ag encies and similar bodies whether local, national or international. Income is th e increase in economic benefits or service potential during the accounting perio d when that results in an increase in the net assets of the NPO. Liabilities are present obligations of the NPO arising from past events, the settlement of whic h is expected to result in an outflow from the NPO of resources embodying econom ic benefits or service potential. 8

Accounting for Non-for-Profit Organisations Net assets are the excess of the book value of assets (other than fictitious ass ets) of the NPO over its liabilities. Restricted funds are contributions receive d by an NPO, the use of which is restricted by the contributor(s). Unrestricted funds are contributions received or funds generated by an NPO, the use of which is not restricted by the contributor(s). ACCOUNTING FRAMEWORK FOR NPOs 18. This Framework is concerned with general purpose financial statements (herea fter referred to as financial statements'). Such financial statements are prepared and presented at least annually and are directed toward the common information n eeds of a wide range of users. These users have to rely on the financial stateme nts as their major source of financial information and cannot prescribe the info rmation they want from an organisation. The general purpose financial statements should, therefore, be prepared and presented with their needs in view. Special purpose financial reports, for example, computations prepared for taxation purpo ses or specialised needs of regulatory bodies, donor agencies, or others having the authority to obtain the type of information they need are outside the scope of this Framework. For instance, a donor agency may prescribe a specific format for reporting the utilisation of its own funds. Where the general purpose financ ial statements prepared in accordance with the recommendations contained in this Technical Guide do not provide such requisite information, it would be appropri ate to prepare a separate statement for the specific purpose envisaged in the re levant statute/regulation or specified in the donor requirements. The recommenda tions contained in this Technical Guide may be applied to such specific purpose statements to the extent appropriate. 19. It is often argued that since profit i s not the objective of NPOs, the accounting framework, which is relevant for bus iness entities is not appropriate for NPOs. With a view to recommend suitable ac counting system for NPOs, it would be imperative to 9

Accounting for Non-for-Profit Organisations understand the major ingredients of an accounting framework. An accounting frame work primarily comprises the following: (a) Elements of financial statements bas ically comprising income, expenses, assets and liabilities The framework aims to identify the items that should be considered as income, expenses, assets and li abilities in NPOs, for the purpose of including the same in the financial statem ents by defining the aforesaid terms. (b) Principles for recognition of items of income, expenses, assets and liabilities These principles lay down the timing o f recognition of the aforesaid items in the financial statements of NPOs. In oth er words, these principles lay down when an item of income, expense, asset or li ability should be recognised in the financial statements. (c) Principles of meas urement of items of income, expenses, assets and liabilities These principles la y down at what amount the aforesaid items should be recognised in the financial statements. (d) Presentation and disclosure principles These principles lay down the manner in which the financial statements are to be presented by NPOs and th e disclosures to be made therein. 20. With regard to elements of financial state ments, it may be noted that what is considered as an asset (e.g., land and furni ture), by a business entity is an asset for an NPO also. However, in case of an NPO, there may be certain assets having only service potential and no economic b enefits, while this may or may not be the case for a business entity. Same is th e case for items of income, 10

Accounting for Non-for-Profit Organisations expenses and liabilities. Therefore, the elements of financial statements remain the same in NPOs as in business entities. 21. Similarly, there is no difference in the application of the recognition principles to business entities and NPOs. For example, the timing of the recognition of a grant as an income in the finan cial statements of an organisation does not depend upon the purpose for which th e organisation is run. A grant is recognised as income in the financial statemen ts, under accrual basis of accounting, when it becomes reasonably certain that t he grant will be received and that the organisation will fulfill the conditions attached to it, and under cash basis of accounting at the time when the grant is actually received. Thus, a business entity and an NPO would both follow the afo resaid criteria for recognition of grant as income depending upon the basis of a ccounting (i.e., cash or accrual basis, discussed hereinafter) followed by the r espective organisation rather than the purpose for which the organisation is run . Similarly, principles for recognition of other incomes, expenses, assets and l iabilities would be the same for business entities and NPOs. 22. Insofar as the measurement principles are concerned, the same principles are relevant to NPOs a s those to business entities. For example, depreciation of an asset represents p rimarily the extent to which the asset is used during an accounting period by an organisation. Thus, whether an asset, such as a photocopying machine, is used b y an NPO or by a business entity, the measure of charge by way of depreciation d epends primarily upon the use of the asset rather than the purpose for which the organisation is run. Accordingly, the measurement principles for other expenses , income, assets and liabilities are the same for business entities and NPOs. 23 . Insofar as presentation of financial statements is concerned, NPOs generally f ollow what is known as fund based accounting' whereas the business entities do not follow this system. This is because NPOs may be funded by numerous grants, donat ions or similar contributions, which may or may not impose conditions on their u sage. In other words, the use of some funds may be restricted by an outside agen cy such as a donor or self-imposed by the 11

Accounting for Non-for-Profit Organisations organisation. It, therefore, follows that the financial statements of NPOs shoul d reflect income, expenses, assets and liabilities in respect of such funds sepa rately so as to enable the users of financial statements such as the contributor s, to assess the usage of the funds contributed by them. However, it may be note d that fund based accounting is relevant primarily for the purpose of presentati on of financial statements and not for the purpose of identification, recognitio n and measurement of various items of income, expenses, assets and liabilities. 24. It may be concluded from the above paragraphs that while the identification, recognition and measurement of elements of financial statements are sector-neut ral, the presentation of financial statements may differ among the two sectors, viz., for-profit sector and not-for-profit sector. Similarly, disclosure princip les may also differ. 25. The accounting framework discussed above would apply to all categories and types of NPOs. However, the books of account to be maintaine d by various NPOs may depend upon the nature of activities and/or programmes car ried out by them. BASIS OF ACCOUNTING 26. The term basis of accounting' refers to the timing of recognition of revenue, e xpenses, assets and liabilities in accounts. The commonly prevailing bases of ac counting are: (a) (b) cash basis of accounting; and accrual basis of accounting. 27. Under the cash basis of accounting, transactions are recorded when the relat ed cash receipts or cash payments take place. Thus, the revenue of NPOs, such as donations, grants, etc. are recognised when funds are actually received. Simila rly, expenses on acquisition and maintenance of assets used for rendering servic es as well for employee remuneration and other items are recorded when the relat ed payments are made. The end-product 12

Accounting for Non-for-Profit Organisations of cash basis of accounting is a statement of receipts and payments that classif ies cash receipts and cash payments under different heads. A statement of assets and liabilities may or may not be prepared. 28. Accrual basis of accounting is the method of recording transactions by which revenue, expenses, assets and liab ilities are reflected in the accounts in the period in which they accrue. The ac crual basis of accounting includes considerations relating to deferral, allocati ons, depreciation and amortisation. This basis is also referred to as Mercantile Basis of Accounting'. 29. Accrual basis of accounting attempts to record the finan cial effects of the transactions and other events of an enterprise in the period in which they occur rather than recording them in the period(s) in which cash i s received or paid. Accrual basis recognises that the economic events that affec t an enterprise's performance often do not coincide with the cash receipts and pay ments. The goal of accrual basis of accounting is to relate the accomplishments (measured in the form of revenue) and the efforts (measured in terms of costs) s o that the reported net income measures an enterprise's performance during a perio d rather than merely listing its cash receipts and payments. Apart from income m easurement, accrual basis of accounting recognises assets, liabilities or compon ents of revenue and expenses for amounts received or paid in cash in past, and a mounts expected to be received or paid in cash in future. 30. In cash based acco unting, no account is taken of whether the asset is still in use, has reached th e end of its useful life, or has been sold. Thus, cash based information fails t o show a proper picture of the financial position and performance for the accoun ting period. A cash based system does not provide information about total costs of an organisation's activities. On the other hand, accrual system of accounting o ffers the opportunity to the organisation to improve management of assets, and p rovides useful information about the real level of organisation's liabilities, rel ating to both debts and other obligations such as employee entitlements. 13

Accounting for Non-for-Profit Organisations 31. NPOs registered under the Companies Act, 1956, are required to maintain thei r books of account according to accrual basis as required in section 209(3)(b) o f the said Act. If the books are not kept on accrual basis, it shall be deemed a s per the provisions of the aforesaid section, that proper books of account are not kept. 32. Accrual is the scientific basis of accounting and has conceptual s uperiority over the cash basis of accounting. It is, therefore, recommended that all NPOs, including non-company NPOs, should maintain their books of account on accrual basis. ACCOUNTING STANDARDS 33. Accounting is often said to be a social science. It operates in an open and ever-changing economic environment. The nature of transactions entered into by v arious enterprises and the circumstances surrounding such transactions differ wi dely. This characteristic of accounting measurements historically led to the ado ption of different accounting practices by different enterprises for dealing wit h similar transactions or situations. 34. Comparability is one of the important qualitative characteristics of accounting information. This implies that the inf ormation should be measured and presented in such a manner that the users are ab le to compare the information of an enterprise through time and with similar inf ormation of other enterprises. Adoption of different accounting practices by dif ferent enterprises for similar transactions or situations tends to reduce the co mparability of accounting information. 35. Recognising the need for bringing abo ut a greater degree of uniformity in accounting measurements, the trend all over the world now is towards formulation of accounting standards to be adopted in p reparation of accounting information and its presentation in financial statement s. Accounting Standards lay down the rules for measurement and presentation of a ccounting information by different enterprises. 14

Accounting for Non-for-Profit Organisations 36. In India, the task of formulating accounting standards has been taken up by the Institute of Chartered Accountants of India (ICAI), which are based on the f undamental accounting assumption of accrual. These Standards thus reflect what c an be construed as proper application of accrual accounting to different types o f transactions and events. APPLICABILITY OF ACCOUNTING STANDARDS TO NPOs 37. The Preface to the Statements of Accounting Standards', issued by the Institute of Chartered Accountants of India, states the following: 3.3 Accounting Standard s are designed to apply to the general purpose financial statements and other fi nancial reporting, which are subject to the attest function of the members of th e ICAI. Accounting Standards apply in respect of any enterprise (whether organis ed in corporate, cooperative or other forms) engaged in commercial, industrial o r business activities, irrespective of whether it is profit oriented or it is es tablished for charitable or religious purposes. Accounting Standards will not, h owever, apply to enterprises only carrying on the activities which are not of co mmercial, industrial or business nature, (e.g., an activity of collecting donati ons and giving them to flood affected people). Exclusion of an enterprise from t he applicability of the Accounting Standards would be permissible only if no par t of the activity of such enterprise is commercial, industrial or business in na ture. Even if a very small proportion of the activities of an enterprise is cons idered to be commercial, industrial or business in nature, the Accounting Standa rds would apply to all its activities including those which are not commercial, industrial or business in nature. 38. From paragraph 37, it is apparent that the Accounting Standards formulated by the ICAI do not apply to an NPO if no part of the activity of such entity is commercial, industrial or business in nature. Th e Standards would apply even if a 15

Accounting for Non-for-Profit Organisations very small proportion of activities is considered to be commercial, industrial o r business in nature. For example, where an NPO is engaged in the commercial act ivity of granting loans/credit to small entrepreneurs at nominal rates of intere st or in the industrial activity of manufacturing clothes for the rural poor, Ac counting Standards formulated by the ICAI would apply to such an NPO. It may be mentioned that since the Accounting Standards contain wholesome principles of ac counting, these principles provide the most appropriate guidance even in case of those organisations to which Accounting Standards do not apply. It is, therefor e, recommended that all NPOs, irrespective of the fact that no part of the activ ities is commercial, industrial or business in nature, should follow Accounting Standards. This is because following the Accounting Standards laid down by ICAI would help NPOs to maintain uniformity in presentation of financial statements, proper disclosure and transparency. However, while applying the Accounting Stand ards certain terms used in the Accounting Standards may need to be modified in t he context of the corresponding appropriate terms for NPOs. For instance, where an Accounting Standard refers to the term statement of profit and loss', in the con text of NPOs, this Technical Guide uses the term income and expenditure account'. 3 9. NPOs incorporated under section 25 of the Companies Act, 1956, are required t o comply with the Accounting Standards by virtue of sub-section (3A) of section 211 of the said Act. Subsection (3B) of section 211 requires that where the prof it and loss account (income and expenditure account) and balance sheet of a comp any do not comply with the Accounting Standards, the company shall disclose in i ts profit and loss statement (income and expenditure account) and balance sheet the fact of such deviation, the reason therefore and the financial effect, if an y, arising due to such deviation. Further, section 227(3)(d) requires the audito r to state whether profit and loss account (income and expenditure account) and balance sheet comply with Accounting Standards referred to in sub-section (3C) o f section 211. Subsection (3C) of section 211 provides that for the purposes of this section, the expression accounting standards' means the standards of accountin g recommended by the Institute of Chartered 16

Accounting for Non-for-Profit Organisations Accountants of India constituted under The Chartered Accountants Act, 1949 (38 o f 1949), as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards (NACAS) established under s ub-section (1) of section 210A. Proviso to sub-section (3C) of the section provi des that the standards of accounting specified by the Institute of Chartered Acc ountants of India shall be deemed to be the Accounting Standards until the Accou nting Standards are prescribed by the Central Government under this sub-section. It may be noted that Accounting Standards 1 to 7 and 9 to 29 as formulated and recommended by the Institute of Chartered Accountants of India have been notifie d by the Central Government under Companies (Accounting Standards) Rules, 2006, in consultation with the NACAS, vide Notification dated December 7, 2006 in the Official Gazette. 40. As far as non-company NPOs (including trusts, societies re gistered under the Societies Registration Act, 1860) carrying on even a very sma ll proportion of commercial, industrial or business activities are concerned, Ac counting Standards, formulated by the Institute of Chartered Accountants of Indi a, are mandatory for the members of the Institute in the performance of their at test functions as per the relevant announcements made by the Institute of Charte red Accountants of India from time to time. 41. So far, the Institute of Charter ed Accountants of India has formulated 32 Accounting Standards out of which one Standard [viz., Accounting Standard (AS) 8, Accounting for Research and Developm ent] is no longer in force and three Standards [viz., Accounting Standard (AS) 3 0, Financial Instruments: Recognition and Measurement; Accounting Standard (AS) 31, Financial Instruments: Presentation; and Accounting Standard (AS) 32, Financ ial Instruments: Disclosure] which have become recommendatory from April 1, 2009 , would become mandatory only from April 1, 2011. For the purpose of applicabili ty of Accounting Standards1, pursuant to the 1 Applicability of Accounting Standards to Companies and Non-Corporate Entities is given in the Harmonisation of Various Differences Between the Accounting Standar ds Issued by the ICAI and the Accounting Standards notified by the Central Gover nment' (Announcement of the Council of the Institute published in The Chartered Acc ountant', February 2008, page 1340). 17

Accounting for Non-for-Profit Organisations notification2 of the Accounting Standards by the Central Government, companies h ave been classified as Small and Medium Sized Companies (SMCs) and Non-SMCs. The ICAI has classified entities other than companies into three categories, viz., Level I, Level II and Level III, where the entities that fall within the meaning of the latter two categories are Small and Medium-sized Enterprises (SMEs). The criteria for classification of non-corporate entities and companies into differ ent categories, and the applicability of the individual Accounting Standards to noncorporate entities and companies are given in Appendix II. Given their resour ces and scale of operations, entities falling within the category of SMEs/SMCs a re given relaxations/exemptions under certain Accounting Standards that contain onerous requirements. This is relevant for small and medium-sized NPOs which mee t the criteria of SMEs/SMCs. In this context it may be mentioned that one of the criteria for categorising SMEs/SMCs is turnover', and turnover in the respect of N POs would mean their gross income. 42. Keeping in view the nature of activities carried on by NPOs, some Accounting Standards may not be relevant to the NPOs un less events or transactions of the nature covered by the Standard take place3. F or example, Accounting Standard (AS) 22, Accounting for Taxes on Income, would b e relevant only where the NPO is required to pay any tax under the provisions of the Income-tax 2 3 Refer paragraph 39 Accounting Standards normally not relevant to NPOs and accord ingly not covered in this Technical Guide are as follows: (a) Accounting Standar d (AS) 7, Construction Contracts (b) Accounting Standard (AS) 14, Accounting for Amalgamations (c) Accounting Standard (AS) 16, Borrowing Costs (d) Accounting S tandard (AS) 20, Earnings Per Share (e) Accounting Standard (AS) 21, Consolidate d Financial Statements (f) Accounting Standard (AS) 22, Accounting for Taxes on Income (g) Accounting Standard (AS) 23, Accounting for Investments in Associates in Consolidated Financial Statements (h) Accounting Standard (AS) 24, Discontin uing Operations (i) Accounting Standard (AS) 25, Interim Financial Reporting (j) Accounting Standard (AS) 27, Financial Reporting of Interests in Joint Ventures However, it may be mentioned that NPOs should follow these Accounting Standards as and when and to the extent these are applicable to them. 18

Accounting for Non-for-Profit Organisations Act. Accounting Standards generally relevant to NPOs have been discussed hereina fter while dealing with peculiar items of income, expenses, assets and liabiliti es. It may also be noted here that while considering whether an Accounting Stand ard is relevant to NPOs or not given the nature of their activities, the Account ing Standards which companies are presently required to follow have been taken i nto account. Accordingly, as the accounting standards on financial instruments, i.e., AS 30, AS 31 and AS 32 are not required to be presently followed by compan ies, these have not been covered in this Technical Guide. RECOGNITION AND MEASUREMENT PRINCIPLES INCOME 43. Income is increase in economic benefits or service potential during the acco unting period when the increase results either in the form of inflows or enhance ments of assets or in the form of decreases in liabilities. The definition of in come encompasses both revenue and gains. 44. Revenue arises in the course of ord inary activities of an organisation. Revenue in case of NPOs is in the form of ( a) Grants from government/foundations/donor agencies on the basis of duly approv ed grant letters, specifying the timeframe/guidelines for grant accrual Research and development grants Donations Sale of non-mission related products for incom e generation Revenue from fund-raising activities, appeals, events, collections 19 (b) (c) (d) (e)

Accounting for Non-for-Profit Organisations (f) Consultancy income earned by NPOs by providing various services Interest and div idend from investments Royalty (g) (h) It may be mentioned that while (a) to (c) are to accounted for as per Accounting Standard (AS) 12, Accounting for Government Grants, (d) to (h) are to be accoun ted for as per Accounting Standard (AS) 9, Revenue Recognition. 45. Gains repres ent other items that meet the definition of income' and may or may not arise in the course of the ordinary activities of NPOs. Gains represent increases in economi c benefits and as such are no different in nature from revenue. Gains include, f or example, profits arising from the disposal of fixed assets and sale of invest ments. When gains are recognised in the income and expenditure account, they are usually disclosed separately. Recognition Criteria for Items of Income 46. An item that meets the definition of income becomes eligible to be recognise d in the financial statements if: (a) it is probable that the inflow or other en hancement of future economic benefits has occurred; and the inflow or other enha ncements of future economic benefits can be measured reliably. (b) Revenue Recognition 47. The criteria for recognition of income specified in the above paragraph have been applied for developing principles of recognition of revenue in AS 9, in re spect of revenue arising from sale of goods, rendering of services and use of re sources of the organisation by others. In the context of NPOs, these principles are discussed in the ensuing paragraphs. 20

Accounting for Non-for-Profit Organisations 48. Recognition of revenue by NPOs from sale of goods: Many NPOs perform income generating activities such as sale of goods, i.e., postcards, calendars, candles , etc. As per AS 9, revenue from sale of goods should be recognised when all the following conditions are fulfilled: (a) The seller of the goods has transferred to the buyer the property in the goods for a price, or all significant risks an d rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated wi th ownership; (b) No significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods; and (c) It is not unreasonable to expect ultimate collection of the consideration. 49. Recognitio n of revenue by NPOs from rendering of services: Rendering of services by NPOs i ncludes providing various consultancy services in the areas of their expertise. In a transaction involving rendering of services, revenue should be recognised o n the basis of the performance of the services. If the performance consists of t he execution of more than one act, revenue should be recognised proportionately by reference to the performance of each act (i.e., on the basis of proportionate completion method). If performance consists of the execution of a single act, o r if it consists of the performance of more than one act and the acts yet to be performed are very significant in relation to the transaction as a whole, revenu e should be recognised only on the completion of performance of the sole or the final act (i.e., on the basis of completed service contract method). Normally, t he terms and conditions of performance of acts constituting the consultancy are documented by way of contracts or MOUs signed by NPOs. In such cases, recognitio n of revenue is linked to satisfactory compliance with such terms and conditions .In general, revenue from services should be recognised only when no significant uncertainty exists regarding the amount of the consideration that will be deriv ed from rendering of the service and about 21

Accounting for Non-for-Profit Organisations its ultimate collectability. However, where, at the time of rendering of the ser vice or sale of goods by an NPO, the ultimate collection of revenue cannot be as sessed with reasonable certainty, revenue recognition should be postponed, till the time when it is reasonably certain that the ultimate collection will be made . When such uncertainty arises after the rendering of service or making of sale, it is more appropriate to make a provision than to adjust the revenue recorded originally. 50. Revenue arising on account of the use of NPO's resources by others : By way of use of its resources by others, NPOs earn revenue in the form of int erest (on savings bank account or on short term deposits), dividends on investme nts, and royalty. Such revenue should be recognised as follows provided no signi ficant uncertainty as to measurability or collectability exists: (a) Interest sh ould be recognised on a time proportion basis taking into account the principal outstanding. Dividends should be recognised when the right of an NPO to receive the dividend payment is established. Royalties should be recognised on accrual b asis in accordance with the terms of the relevant agreement. (b) (c) Grants and Donations Recognition and Measurement 51. Grants are assistance by government/non-government agencies in cash or in ki nd for part or future compliance with certain conditions. Receipt of grants by N POs is significant in preparation of financial statements for following two reas ons: (a) Firstly, if a grant has been received, an appropriate method of account ing therefore is necessary; Secondly, it is desirable to give an indication of t he extent to which the recipient NPO has benefited from 22 (b)

Accounting for Non-for-Profit Organisations such a grant during the reporting period. Further, this will facilitate comparis on of an NPO's financial statements with those of prior periods and with those of other NPOs, which are receiving similar types of grants. 52. Accounting Standard (AS) 12, Accounting for Government Grants, prescribes accounting treatment for government grants. The accounting treatment prescribed in AS 12 is based on the nature of the grant and the purpose for which the grant is received. Accordingly , NPOs should follow the principles enunciated in AS 12 in respect of accounting for government grants as also for the grants received from non-government sourc es, e.g., foundations, individual donors and corporate bodies. 53. According to the principles laid down in AS 12, grants should not be recognised until there i s reasonable assurance that: (a) the NPO will comply with the conditions attache d to them; and the grants will be received. (b) 54. A mere promise or undertaking from the government and other donor agencies a s to the grant does not provide reasonable assurance that the grant will be rece ived and, therefore, does not require its recognition. The NPOs should recognise a grant in its financial statements only at the stage it attains reasonable ass urance, on the basis of all available evidence, that the grant will be received. If there is no reasonable assurance that the grant or any part thereof, will be received, recognition of such a grant, or a part thereof, should be postponed. However, the fact that collection of the grant has been delayed does not necessa rily mean that reasonable assurance does not exist. The grant, the recognition o f which has been postponed as suggested hereto before, should be recognised only in the period in which reasonable assurance is attained that the grant will be received. In some cases, the reasonable assurance will be attained only when cas h is actually received. In such a case, recognition of grant on receipt basis do es not mean that the NPO has not followed accrual basis of accounting. 23

Accounting for Non-for-Profit Organisations 55. Keeping in view the principles enunciated in AS 12, the nature of activities carried on by NPOs and maintaining uniformity of accounting policies followed, an NPO should account for grants as follows: (a) Grant received or receivable fo r construction or acquisition of a specific fixed asset, such as, land, building , furniture, etc., should be accounted for as below: (i) Grants received to acqu ire a non-depreciable asset, e.g., freehold land, should be recognised separatel y as a Restricted Fund' in the balance sheet. When the asset is acquired, the conce rned restricted fund is transferred to the General Fund' in the balance sheet. Howe ver, if a grant related to a nondepreciable asset requires the fulfillment of ce rtain obligations, the grant should be treated as deferred income and recognised as income over the same period over which the cost of meeting such obligations is charged to income. Grants related to a depreciable fixed asset should be trea ted as deferred income and recognised in the income and expenditure account by a llocating it over the useful life of the asset in the proportion in which a depr eciation on the asset concerned is charged. (ii) (iii) The deferred income balance, if any, should be shown separately in the bal ance sheet. (b) Grants in the form of non-monetary assets (such as fixed assets) received at a concessional rate should be accounted for on the basis of their a cquisition cost to the NPO. In case a non-monetary grant is received free of cos t, it should be recognised at the nominal value of Re. 1. 24

Accounting for Non-for-Profit Organisations (c) For grants received for the purpose of meeting revenue expenditure of the NPO, b oth the grant (to the extent utilised during the period) and the relevant expens e should be disclosed separately in the income and expenditure account. Such a d isclosure would be useful in appreciating the operations undertaken by the NPO d uring the period. Grants of the nature of promoters' contribution4 should be recog nised separately as a part of the General Fund in the balance sheet. In some cas es, a grant may be receivable by an NPO as compensation for expenses or losses i ncurred in a previous accounting period, or for providing immediate financial su pport to the NPO with no related further costs. Such grants should be recognised and disclosed in the income and expenditure account of the period in which they are receivable. The amount refundable in respect of grants received that relate to revenue as well as those that relate to specific fixed assets, should be app lied first against any unamortised deferred credit remaining in respect of the g rant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount should be charged to the income and expenditure account of the NPO. The principles enunciated in respect of gran ts as dealt with in the above points also apply to donations. (d) (e) (f) (g) 56. The detailed application of the principles enunciated above in respect of gr ants and donations in the financial statements, in the context of fund based acc ounting, has been dealt with subsequently. 4 See explanation of Corpus' given in paragraph 110. 25

Accounting for Non-for-Profit Organisations 57. Grants and donations in foreign currency and the resulting foreign exchange differences: NPOs may receive grants or donations in foreign currency. To accoun t for transactions in foreign currency, the principles of Accounting Standard (A S) 11, The Effects of Changes in Foreign Exchange Rates will apply. Accordingly, as per AS 11, transactions for the receipt of grants/ donations involving forei gn exchange should be initially recorded at the exchange rate prevalent on the d ate of transaction. Subsequently, at each balance sheet date, the amounts receiv able in respect of such grants/donations should be reported using the closing ex change rate, i.e., the rate prevailing on the balance sheet date. Any exchange d ifferences related to amounts receivable arising on account of change in exchang e rates between the transaction date and the balance sheet date should be recogn ised in the income and expenditure account. EXPENSES 58. The definition of expense' encompasses both, expenses that arise in the course of the ordinary activities of NPOs as well as losses. Expenses that arise in the course of the ordinary activities of NPOs include monetary expenses such as pro gramme implementation expenses; office administration/maintenance expenses; sala ries and other employee benefits; and non-monetary expenses such as depreciation . The expenses take the form of an outflow or depletion of assets or enhancement of liabilities. 59. Losses represent other items that meet the definition of exp ense' and may or may not arise in the course of the ordinary activities of NPOs. L osses represent decreases in economic benefits and as such they are no different in nature from other expenses. Losses include, for example, those resulting fro m disasters such as fire and flood, as well as those arising from the disposal o f fixed assets. The definition of expenses also includes unrealised losses. Thes e losses are generally recognised in the income and expenditure account, and are usually disclosed separately. 26

Accounting for Non-for-Profit Organisations Recognition Criteria for Items of Expense 60. An item that meets the definition of expense' becomes eligible to be recognised in the income and expenditure account when and only when: (a) it is probable th at the consumption or loss of future economic benefits resulting in a reduction in assets and/or an increase in liabilities has occurred; the consumption or los s of future economic benefits can be measured reliably. (b) 61. Under accrual basis of accounting, expenses are recognised on the following basis: (a) Identification with revenue transactions: Costs directly associated w ith the revenue recognised during the relevant period (in respect of which wheth er money has been paid or not) are considered as expenses and are charged to inc ome for the period. Identification with a period of time: In many cases, althoug h some costs may have connection with the revenue for the period, the relationsh ip is so indirect that it is impracticable to attempt to establish it. However, there is a clear identification with a period of time. Such costs are regarded a s period costs' and are expensed in the relevant period, e.g., salaries, telephone, travelling, depreciation on office building, etc. Similarly, the costs the bene fits of which do not clearly extend beyond the accounting period are also charge d as expenses. (b) 62. Expenses relating to a future period are accounted for as prepaid expenses e ven though they are paid for in the current accounting period. Similarly, expens es of the current year, for which payment has not yet been made (outstanding exp enses), are charged to the income and expenditure account for the current accoun ting period. 27

Accounting for Non-for-Profit Organisations Programme implementation expenses and office administration/maintenance expenses 63. The expenditures in NPOs are generally a blend of programme implementation e xpenses, programme monitoring expenses, salaries and administration expenses. Al l the programme implementation/monitoring expenses and office administration/ ma intenance expenses should be recognised in the income and expenditure account on the basis of the criteria for recognition as stated in the previous paragraphs. The recognition of other types of expenses has been covered in the following pa ragraphs. Salaries and other employee benefits 64. The salaries in case of NPOs are towards the programme staff and non-program me staff members. For the purpose of recognition of expenses there is no distinc tion between these two major categories of salaries and other benefits. Accounti ng Standard (AS) 15 (revised), Employee Benefits prescribes accounting and discl osure for all employee benefits, except employee share-based payments. Though it is applicable to all enterprises, considering the limited resources available w ith the SMEs/SMCs to apply AS 15 (revised), relaxations/exemptions from certain requirements of AS 15 (revised) have been provided to them. Accordingly, NPOs fa lling within the meaning of SMEs/SMCs can avail of such relaxations/exemptions. For example, an NPO falling under the category of SMEs and whose average number of persons employed during the year is less than 50 is exempted completely from the application of actuarial method for defined benefit plans [for details of al l the exemptions/relaxations available under AS 15 (revised) to SMEs/SMCs, Appen dix II may be referred]. 65. AS 15 (revised) identifies four categories of emplo yee benefits: (a) short-term employee benefits, such as wages, salaries and soci al security contributions (e.g., contribution to an insurance company by an empl oyer to pay for 28

Accounting for Non-for-Profit Organisations medical care of its employees), paid annual leave, profitsharing and bonuses (if payable within twelve months of the end of the period) and non-monetary benefit s (such as medical care, housing, cars and free or subsidised goods or services) for current employees; (b) post-employment benefits such as gratuity, pension, other retirement benefits, post-employment life insurance and post-employment me dical care; other long-term employee benefits, including longservice leave or sa bbatical leave, jubilee or other longservice benefits, long-term disability bene fits and, if they are not payable wholly within twelve months after the end of t he period, profit-sharing, bonuses and deferred compensation; and termination be nefits. (c) (d) 66. Recognition of short-term employee benefits: AS 15 (revised) requires an ent erprise to recognise the undiscounted amount of short-term employee benefits whe n an employee has rendered service in exchange for those benefits. 67. Post-empl oyment benefits: These are classified as either defined contribution plans or de fined benefit plans. Under defined contribution plans such as provident fund, th e enterprise's obligation is limited to the amount that it agrees to contribute to the fund and in consequence, actuarial risk (that benefits will be less than ex pected) and investment risk (that assets invested will be insufficient to meet e xpected benefits) fall on the employee. AS 15 (revised) requires that when an em ployee has rendered service to an enterprise during a period, the enterprise sho uld recognise the contribution payable to a defined contribution plan in exchang e for that service. All other post-employment benefit plans are defined benefit plans. Defined benefit plans may be unfunded, or they may be wholly or partly fu nded by contributions by an enterprise, and sometimes its employees, into an ent ity, or fund, that is legally separate from the reporting enterprise and from wh ich the employee 29

Accounting for Non-for-Profit Organisations benefits are paid. Examples of defined benefit plans are pension and gratuity. A s per AS 15 (revised), for defined plans, the amount recognised in the balance s heet should be the present value of the defined benefit obligation (that is, the present value of expected future payments required to settle the obligation res ulting from employee service in the current and prior periods), as adjusted for unrecognised past service cost, and reduced by the fair value of plan assets at the balance sheet date. The present value of the defined benefit obligation shou ld be determined using an actuarial valuation method (Projected Unit Credit Meth od). The Standard also prescribes amounts with regard to the defined benefit pla ns to be reflected in the income and expenditure account. 68. Other long-term em ployee benefits: AS 15 (revised) requires a simplified method of accounting for other long-term employee benefits. This method differs from the accounting requi red for post-employment benefits insofar as that all past service cost is recogn ised immediately. 69. Termination benefits: These are employee benefits payable as a result of either an enterprise's decision to terminate an employee's employment before the normal retirement date; or an employee's decision to accept voluntary redundancy in exchange for these benefits. An enterprise should recognise termin ation benefits as a liability and an expense when and only when: (a) the enterpr ise has a present obligation as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation . (b) (c) Non-monetary expenses Depreciation 70. NPOs use buildings, computers, furniture and fixtures and 30

Accounting for Non-for-Profit Organisations other assets having long life. Such assets are used by NPOs over their useful li fe and, accordingly, are depreciated over that period. Such assets are known as d epreciable assets'. 71. Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of tim e or obsolescence through technology and market changes. Depreciation is allocat ed so as to charge a fair proportion of the depreciable amount in each accountin g period during the expected useful life of the asset. Thus, the purpose of char ging depreciation is to spread the cost of a depreciable asset over its useful l ife so as to charge it as an expense in the income and expenditure account. A co rresponding depreciation fund may be created as a management decision or under a legal requirement, if any, to replace the asset on the expiry of its useful lif e. Thus, non-creation of a depreciation fund, if there is no legal requirement, does not adversely affect the true and fair view of the financial statements eve n though it may be financially prudent to do so. 72. Depreciable amount of a dep reciable asset refers to the historical cost, or the revalued amount, as reduced by its estimated residual value. The useful life of a depreciable asset is eith er the period over which it is expected to be used by the organisation, or the n umber of production or similar units expected to be obtained from the use of the asset by an organisation. 73. Accounting Standard (AS) 6, Depreciation Accounti ng, prescribes requirements for charging depreciation on various depreciable ass ets. Keeping in view the requirements of AS 6, nature of activities carried on b y NPOs and to maintain uniformity of accounting followed by various NPOs, deprec iation should be provided on various depreciable assets as follows: (a) The meth od of depreciation used by NPOs to charge depreciation should be followed consis tently. A change from one method to another should be made only if its adoption is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation 31

Accounting for Non-for-Profit Organisations or presentation of the financial statements of the NPO. When a change in the met hod is made, depreciation should be recalculated in accordance with this new met hod from the date of the asset coming into use. The deficiency or surplus arisin g from the retrospective recomputation of depreciation in accordance with the ne w method should be charged or credited (as the case may be) to the income and ex penditure account for the year in which the method of depreciation is changed. ( b) The rates of depreciation that NPOs are required to follow should be in accor dance with the expected useful life of the assets. In case of NPOs registered un der the Companies Act, the rates as prescribed in Schedule XIV to the said Act s hould be applied. Any addition or extension which becomes an integral part of th e existing asset should be depreciated over the remaining useful life of that as set. Alternatively, depreciation on such addition or extension may be provided a t the rate applied to the existing asset. However, where an addition or extensio n retains its separate identity and is capable of being used after the existing asset is disposed of, depreciation on the same should be provided independently on the basis of an estimate of its own useful life. Where a depreciable asset is disposed of, scrapped, retired, etc., the net surplus or deficiency, if materia l, should be disclosed separately. (c) (d) 74. In case of donated fixed assets or fixed assets received as non-monetary gra nts, no depreciation is required to be provided if the assets are recorded at no minal value (see paragraph 55). 75. It is sometimes argued that no depreciation need be provided in case of fixed assets which are purchased and are expected to be replaced by donors when the useful life of the assets is over. 32

Accounting for Non-for-Profit Organisations However, this argument is not valid because, in accounting, the purpose of charg ing depreciation is not to accumulate funds to replace a fixed asset; the purpos e is to allocate the cost of the fixed asset over its useful life so that the pe riodic net result of operations of the enterprise reflects the use of the fixed asset. ASSETS 76. An asset is a resource controlled by an NPO as a result of past events and f rom which future economic benefits or service potential is expected to flow to t he NPO. A resource should be considered to be controlled by an NPO if it is in a position to control the use of the asset, i.e., it is in a position to obtain a ll the rewards from the asset which means all the future economic benefits assoc iated with it will flow to the NPO. 77. Many assets, for example, computers and buildings have a physical form. However, physical form is not essential to the e xistence of an asset. Hence, intangible assets such as copyrights and computer s oftware are also assets, if they are controlled by the NPO and future benefits f rom their use are expected to flow to the NPO. Recognition and Measurement of Assets 78. An asset should be recognised in the balance sheet when and only when: (a) i t is probable that the future economic benefits embodied in the asset will be re ceived; and the asset possesses a cost or value that can be measured reliably. (b) 79. Assets can be classified into various categories depending on their nature a nd life such as fixed assets; intangible assets; investments both current and lo ng-term; and current assets inventories, loans and advances, cash and bank balan ces. 33

Accounting for Non-for-Profit Organisations 80. The recognition and measurement principles with regard to the aforesaid cate gories of assets are dealt with hereinafter in the context of the accounting sta ndards where relevant from the perspective of NPOs. Fixed assets 81. Accounting Standard (AS) 10, Accounting for Fixed Assets, lays down, inter a lia, recognition and measurement principles with regard to tangible fixed assets , the salient features of which from the perspective of an NPO are given below: (a) A fixed asset is defined as an asset held with the intention of being used fo r the purpose of producing or providing goods or services and is not held for sa le in the normal course of business. The financial statements should disclose, in ter alia, the gross book value of fixed assets. The gross book value of a fixed asset should be either its historical cost or a revalued amount. The cost of a f ixed asset is determined in the manner given below: (i) The cost of a purchased fixed asset comprises its purchase price and any attributable cost of bringing t he asset to its working condition for its intended use. (b) (c) (ii) The cost of a self-constructed fixed asset should comprise those costs that relate directly to the specific asset and those that are attributable to the co nstruction activity in general and can be allocated to the specific asset. (iii) When a fixed asset is acquired in exchange or in part exchange for another asse t, the asset acquired should be recorded either at fair market value or at the n et book value of the asset given up, adjusted 34

Accounting for Non-for-Profit Organisations for any balancing payment or receipt of cash or other consideration. Fair market value is the price that would be agreed to in an open and unrestricted market b etween knowledgeable and willing parties dealing at arm's length who are fully inf ormed and are not under any compulsion to transact. Fair market value may be det ermined by reference either to the asset given up or to the asset acquired, whic hever is more clearly evident. (iv) Where several fixed assets are purchased for a consolidated price, the consideration should be apportioned to various assets on a fair basis as determined by competent valuers. (d) Subsequent expenditure related to an item of fixed asset should be added to its book value only if it i ncreases the future benefits from the existing asset beyond its previously asses sed standard of performance. Material items retired from active use and held for disposal should be stated at the lower of their net book value and net realisab le value and shown separately in the financial statements. A fixed asset should be eliminated from the financial statements on disposal or when no further benef it is expected from its use and disposal. Any profit or loss arising from retire ment or disposal of fixed assets should be dealt with as below: (i) Losses arisi ng from the retirement or gains or losses arising from disposal of a fixed asset which is carried at cost should be recognised in the income and expenditure acc ount. (e) (f) (g) (ii) Where a previously revalued item of fixed asset is disposed off, any loss o r gain (i.e., the difference 35

Accounting for Non-for-Profit Organisations between net disposal proceeds and the net book value) should be charged or credi ted to the income and expenditure account. However, to the extent that such a lo ss is related to an increase which was previously recorded as a credit to revalu ation reserve and which has not been subsequently reversed or utilised, it may b e charged directly to that account. (h) All costs which are incurred in bringing an asset to its working condition for its intended use should be added to the c ost of the fixed asset. Examples of directly attributable costs are, initial del ivery and handling costs, site preparation, professional fees, for example fees of architects and engineers. In case of land, cost of any improvement to land su ch as filling cost, fencing cost, etc. should be capitalised as a part of the co st of land. In case any super-structure has been built on land, the cost of such super-structure should be capitalised separately under the head buildings'. Where a fixed asset is obtained by an NPO free of cost, such an asset is a non-monetar y grant and, accordingly, should be accounted for as per AS 12, which requires t hat non-monetary grants should be accounted for at a nominal value (e.g. rupee o ne). Any incidental costs of acquisition such as registration charges, transport ation charges, etc., should be added to the cost of the fixed asset. When such a ssets are disposed off, the gain being the difference in the carrying amount, i. e., Re. 1 and the sale proceeds should be recognised. (i) 82. The application of AS 10 to some major items of fixed assets in the context of peculiar features of NPOs is discussed below: (a) Land: An NPO may acquire la nd in a variety of ways such as the following: (i) By way of purchase from land owners. 36

Accounting for Non-for-Profit Organisations (ii) Land gifted to NPOs by institutions or individuals, whether with or without any conditions as to their use. This includes open spaces gifted by the promote rs of colonies, etc. (iii) Land provided to NPOs by government free of cost, whe ther with or without any conditions as to their use. Besides the above, some lan d may also be vested in NPOs in respect of which such an NPO acts merely as a tr ustee and has no ownership rights. The accounting treatment of land acquired thr ough the above modes may be as follows: Land acquired through purchase Such land should be recorded at the aggregate of the purchase price paid/payable and othe r costs incidental to acquisition such as registration charges. Land acquired fr ee of cost In many cases, land is provided by the government free of cost. In so me cases, land is also provided by individuals or institutions under endowment f or specific purposes like construction of schools, etc., or by promoters of colo nies, etc., for construction of parks and similar common facilities. The cost of such land to the NPOs is nil. In substance, such land received is a non-monetar y grant and, accordingly, should be accounted for at nominal value as per AS 12. However, to maintain proper control, such land must be recorded in the fixed as sets register. Any incidental costs of acquisition such as registration charges should be added to the above. 37

Accounting for Non-for-Profit Organisations Vested Government Land Such land is neither owned by the NPO nor do the economic benefits from use of such land otherwise flow to the NPO. The ownership remains with the government and the NPO merely acts as a trustee in respect of such lan d. As neither the ownership nor the economic benefits arising from such land ves t with the NPO, it should not be considered as an asset of the NPO. Land Improvements Cost of any improvement to land such as filling cost, fencing cost, etc., should be capitalised as a part of the cost of land. However, in cas e of vested government land, the cost of improvement to land should not be capit alised but treated as a revenue expenditure. In case any super-structure has bee n built on land, the cost of such super-structure should be capitalised separate ly under the head buildings'. (b) Buildings: The cost of buildings should be taken as the aggregate of the pur chase price and incidental costs such as registration charges. In the case of se lf-constructed buildings, the cost would comprise those costs that relate direct ly to the construction of the building and an appropriate portion of other gener al construction costs. (c) Plant and Machinery: The cost of plant and machinery would include, besides purchase price, such costs as site preparation costs, ins tallation costs and professional fees. (d) Other Fixed Assets: The cost of other fixed assets such as vehicles, furniture and fittings, office equipment, etc., comprise the purchase price and incidental costs such as freight, installation c harges, etc. (e) Composite Fixed Assets: In some cases, a single asset may compr ise several components of different nature. For example, a park may comprise, ap art from land, buildings, pumping station 38

Accounting for Non-for-Profit Organisations machinery, swings, etc. Where each of these assets has been purchased/constructe d separately, the attributable cost (i.e., purchase price and incidental costs, or the cost of construction, as the case may be) of each asset should be capital ised under the respective account head. On the other hand, where a composite ass et has been purchased or constructed for a consolidated amount, such amount shou ld be apportioned among the various components of the asset on a reasonable basi s, e.g., in proportion to their respective market prices on the date of acquisit ion. 83. Opening Balance at the Time of Shift to Accrual Basis: A major problem in accounting for fixed assets would arise at the time an NPO switches over to a ccrual basis of accounting. Many assets, e.g., those received by way of donation s or endowments, may not have been recorded at the time they were acquired. It w ould be necessary to identify such assets and account for them appropriately. In accounting for such assets, factors such as adverse possession, defects in titl e, etc., would also need to be considered. Intangible assets 84. The recognition and measurement of intangible assets is prescribed under Acc ounting Standard (AS) 26, Intangible Assets, the salient features of which from the perspective of an NPO are given below: (a) Intangible asset is defined as an identifiable nonmonetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administ rative purposes. If an item covered by AS 26 does not meet the definition of an i ntangible asset, expenditure to acquire it or generate it internally is recognis ed as an expense when it is incurred. In some cases, an asset may incorporate bo th intangible and tangible elements that are, in practice, inseparable. To deter mine whether such an asset should be treated 39 (b) (c)

Accounting for Non-for-Profit Organisations as fixed assets under AS 10, or as an intangible asset under AS 26, judgement is required to assess as to which element is predominant. (d) An intangible asset should be recognised if, and only if: (i) it is probable that the future economi c benefits that are attributable to the asset will flow to the enterprise; and (ii) the cost of the asset can be measured reliably. (e) The future economic ben efits flowing from an intangible asset may include revenue from the sale of prod ucts or services, cost savings, or other benefits resulting from the use of the asset by the enterprise. The cost of an intangible asset comprises its purchase price, including any import duties and other taxes (other than those subsequentl y recoverable by the enterprise from the taxing authorities), and any directly a ttributable expenditure for making the asset ready for its intended use. Intangi ble asset acquired free of charge, or for nominal consideration, by way of a gov ernment grant should be accounted for in accordance with the requirements of AS 12, Accounting for Government Grants. Cost of intangible asset acquired in excha nge or part exchange of another asset is determined in accordance with the princ iples laid down in this regard in AS 10, Accounting for Fixed Assets. Internally generated goodwill should not be recognised as an asset because it is not an id entifiable resource controlled by the enterprise that can be measured reliably a t cost. Internally generated brands, mastheads, publishing titles, customer list s and items similar in 40 (f) (g) (h) (i)

Accounting for Non-for-Profit Organisations substance should not be recognised as intangible assets. (j) No intangible asset arising from research (or from the research phase of an internal project) shoul d be recognised. Expenditure on research (or on the research phase of an interna l project) should be recognised as an expense when it is incurred. Impairment of Assets 85. An asset is carried at more than its recoverable amount if its carrying amou nt exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and Accounting Standard (AS) 28, Impairment of Assets, requires the enterprise to recognise an impairment loss. AS 28 also specifies when an enterprise should reverse an impairment loss and it prescribes certain disclosures for impaired assets. It applies to accounting fo r the impairment of all assets carried at cost as also to the assets carried at revalued amounts in accordance with other applicable Accounting Standards. It ma y be mentioned that the recoverable amount is the higher of net selling price' and v alue in use' of the asset. For determining value of use', the present value of future cash flows from the asset is required to be worked out. It may be noted in resp ect of this requirement, that SMEs/SMCs are given relaxation not to use the pres ent value technique, but to arrive at the amount of value in use' based on reasonab le estimate. This is relevant for an NPO that falls within the meaning of SME/SM C [for details of the relaxation available under AS 28 to SMEs/SMCs, Appendix II may be referred]. Current Assets 86. Inventories: NPOs carrying on any trading/manufacturing activity may have in ventories at the year-end that are: (a) held for sale in the ordinary course of business; 41

Accounting for Non-for-Profit Organisations (b) (c) in the process of production for such sale; or in the form of materials or suppl ies to be consumed in the production process or in the rendering of services. In accordance with the Accounting Standard (AS) 2, Valuation of Inventories, the se inventories should be valued at lower of cost and net realisable value. 87. C ertain items are manufactured or purchased for the purpose of distributing to be neficiaries either free of cost or at a nominal amount. Since such items are not held for the purpose of sale or in the process of production for such sale or t hey are not in the form of materials or supplies to be consumed in the productio n process or in the rendering of services of commercial, industrial or business nature, such items cannot be considered as inventories within the meaning of AS 2. In view of this, such items should be valued at the lower of cost or replacem ent cost, if available. 88. In certain cases, NPOs may receive items from donor agencies either free of cost or at a nominal charge for distribution to benefici aries or for sale. A part of these items may remain undistributed/unsold, at the year-end. NPOs should disclose the market prices or estimated net realisable va lues of such items, lying at the year-end, in the notes to accounts, along with quantitative details. 89. Loans and advances: These should be carried at the low er of cost and their net realisable value. In view of this, if there is a signif icant uncertainty about collectability of a loan or advance, e.g., loan given to employees, a provision to the extent of the amount considered uncollectable sho uld be made by a charge to the income and expenditure account. 90. Investments: As per Accounting Standard (AS) 13, Accounting for Investments, which deals with accounting for investments in the financial statements of enterprises and relat ed disclosure requirements, investments are defined as assets held by an enterpri se for earning income by way of dividends, interest, 42

Accounting for Non-for-Profit Organisations and rentals, for capital appreciation, or for other benefits to the investing en terprise. NPOs may invest their funds in securities such as, government bonds and units. They may also invest monies received in respect of specific funds with a view to liquidate them at the time of incurrence of the expenditure for the spe cified purpose. These investments could be in short term fixed deposits with ban ks. NPOs should account for investments in accordance with AS 13 as follows: (a) An NPO should disclose current investments and long term investments distinctly in its financial statements. A current investment is an investment that is by i ts nature readily realisable and is intended to be held for not more than one ye ar from the date on which such investment is made. A long term investment is an investment other than a current investment. The cost of an investment should inc lude acquisition charges such as brokerage, fees and duties. Where an investment has been purchased on cum-dividend or cum-interest basis, the interest or divid end received subsequently should be allocated between preacquisition and post-ac quisition periods. The interest or dividend relating to the pre-acquisition peri od represents a recovery of cost and should, accordingly, be deducted in arrivin g at cost. Investments classified as current investments should be carried in th e financial statements at the lower of cost and fair value. The comparison of co st and fair value for determining the carrying amount of current investments sho uld be made either on an individual investment basis (i.e., cost and fair value should be compared separately for each investment) or by category of investment (i.e., cost of an entire category of investments such as government securities s hould be compared with its fair value). 43 (b) (c) (d)

Accounting for Non-for-Profit Organisations (e) Investments classified as long term investments should be carried in the financi al statements at cost. However, provision for diminution should be made to recog nise a decline, other than temporary, in the value of the investments, such redu ction being determined and made for each investment individually. Any reduction in the carrying amount and any reversals of such reductions should be charged to income. On disposal of an investment, the difference between the carrying amoun t and net disposal proceeds should be charged or credited to income. When dispos ing of a part of the holding of an individual investment, the carrying amount to be allocated to that part is to be determined on the basis of the average carry ing amount of the total holding of the investment. (f) (g) LIABILITIES 91. An essential characteristic of a liability is that the enterprise has a pres ent obligation. An obligation is a duty or responsibility to act or perform in a certain way. Obligations may be legally enforceable as a consequence of a bindi ng contract or a statutory requirement. This is normally the case, for example, with amounts payable for goods and services received and taxes to be paid. Oblig ations also arise, however, from normal practices followed by the enterprise, cu stom and a desire to maintain good relations or act in an equitable manner. Recognition and Measurement of Liabilities 92. A liability should be recognised in the balance sheet when and only when: (a ) it is probable that any future sacrifice of economic benefits will be required ; and the amount of the liability can be measured reliably. 44 (b)

Accounting for Non-for-Profit Organisations 93. The settlement of a liability usually involves the enterprise giving up reso urces embodying economic benefits in order to satisfy the claim of the other par ty. Settlement of a liability may occur in a number of ways, for example, by: (a ) (b) (c) (d) payment of cash; transfer of other assets; provision of services; replacement of that obligation with another obligation An obligation may also be extinguished by other means, such as a creditor waivin g or forfeiting its rights. 94. In the case of NPOs, liabilities are normally in the form of payments due to the suppliers of material and services or any incom e received in advance. They could also represent unutilised grants of funding ag encies. These liabilities should be measured at the amount at which they are due for payment and recognised on the basis of the criteria specified above. PROVISIONS 95. Some liabilities can be measured only by using a substantial degree of estim ation. Such liabilities are commonly described as provisions'. Provisions are creat ed through a charge to the income and expenditure account against the correspond ing liability created. Examples of provisions include provisions for payment of telephone and electricity charges of NPOs. Recognition and Measurement of a Provision 96. An NPO should recognise and measure provisions in accordance with Accounting Standard (AS) 29, Provisions, Contingent Liabilities and Contingent Assets. AS 29 requires that a provision should be recognised when: 45

Accounting for Non-for-Profit Organisations (a) (b) there is a present obligation as a result of a past event; it is probable that a n outflow of resources embodying economic benefits will be required to settle th e obligation; and a reliable estimate can be made of the amount of the obligatio n. (c) If these conditions are not met, no provision should be recognised. As per AS 29 , present obligation is an obligation if, based on the evidence available, its e xistence at the balance sheet date is considered probable, i.e., more likely tha n not. According to AS 29, the amount recognised as a provision should be the be st estimate of the expenditure required to settle the present obligation at the balance sheet date. 97. Contingent liabilities: AS 29 defines the terms contingen t liability' and possible obligation' as below: A contingent liability is: (a) a possi ble obligation that arises from past events and the existence of which will be c onfirmed only by the occurrence or non-occurrence of one or more uncertain futur e events not wholly within the control of the enterprise; or a present obligatio n that arises from past events but is not recognised because: (i) it is not prob able that an outflow of resources embodying economic benefits will be required t o settle the obligation; or (b) (ii) a reliable estimate of the amount of the obligation cannot be made. 46

Accounting for Non-for-Profit Organisations Possible obligation an obligation is a possible obligation if, based on the evide nce available, its existence at the balance sheet date is considered not probabl e. 98. As per AS 29, an NPO should not recognise a contingent liability on the fa ce of financial statements, but it should make the following disclosures, for ea ch class of contingent liability, in the notes to financial statements, unless t he possibility of any outflow in settlement is remote: (a) (b) (c) a brief descr iption of the nature of the contingent liability; an estimate of its financial e ffect; an indication of the uncertainties relating to any outflow; and the possi bility of any reimbursement. (d) 99. Where any of the information required in the paragraph above is not disclose d because it is not practicable to do so, that fact should be stated. BOOKS OF ACCOUNT TO BE MAINTAINED BY AN NPO 100. Every NPO should maintain proper books of account with respect to: (a) all sums of monies received by the NPO and the matters in respect of which receipts take place, showing distinctly the amounts received from income generating activ ities and through grants and donations; all sums of money expended by the NPO an d the matters in respect of which expenditure takes place; all assets and liabil ities of the NPO. 47 (b) (c)

Accounting for Non-for-Profit Organisations 101. Proper books of account would not be deemed to be kept with respect to the matters specified therein: (a) if such books are not kept as are necessary to gi ve a true and fair view of the state of affairs of the NPO, and to explain its t ransactions; if such books are not kept on accrual basis and according to the do uble entry system of accounting; and if such books are not kept so as to reflect a true and fair view of various funds maintained by the NPO. (b) (c) 102. The books of account of an NPO may be structured in a manner that is suited to its needs and requirements. For instance: (a) A separate set of books and re cords may be maintained for foreign and Indian contributions, as per the require ments of the Foreign Contribution (Regulation) Act. Similarly, separate sets of books and records may be maintained for the various projects, branches and field offices that the NPO may have for implementing its programmes and interventions . Separate ledgers and records may also be maintained with regard to the various funds representing the grants received from various sources, including the gove rnments and different funding agencies, received with or without stipulations an d restrictions. This may also be referred to as Fund Based Accounting, which is discussed in detail in the following paragraphs. (b) (c) FORMATS OF FINANCIAL STATEMENTS 103. The accounting process in an organisation culminates in the preparation of its financial statements. The financial statements 48

Accounting for Non-for-Profit Organisations are intended to reflect the operating results during a given period and the stat e of affairs at a particular date in a clear and comprehensive manner. The basic financial statements relevant to an NPO are income and expenditure account and balance sheet and notes, other statements and explanatory material that are an i ntegral part of the financial statements. They may also include supplementary sc hedules and information based on or derived from, and expected to be read with s uch statements. In addition, NPOs should also prepare a cash flow statement in a ccordance with Accounting Standard (AS) 3, Cash Flow Statements where applicable 5. Financial statements do not, however, include reports by the governing body, for example, the trustees, statement by the chairman, discussion and analysis by management and similar reports that may be included in a financial or annual re port. 104. Income and expenditure account is a nominal account which is prepared by an NPO in lieu of a profit and loss account. An income and expenditure accou nt should contain all revenue earned and expenses incurred by an NPO during an a ccounting period. The net result, i.e., the difference between revenues and expe nses is depicted in the form of surplus, i.e., excess of income over expenditure , or deficit, i.e., excess of expenditure over income for the period. For the pr eparation of income and expenditure account only revenue items are taken into co nsideration and capital items are totally excluded. Incomes received in advance and prepaid expenses at the end of the accounting period are also excluded while preparing this account and are disclosed as a liability and an asset, respectiv ely, in the balance sheet. These are included as incomes and expenses in the acc ounting periods to which they relate. 105. Since the purpose of fund based accou nting in an NPO, discussed in detail hereinafter, is to present income and expen se in respect of restricted funds as distinguished from unrestricted fund, it is recommended that the income and expenditure account should have three columns, namely, 5 An NPO falling within the meaning of SME/SMC is exempted from applying AS 3, i.e ., preparing a cash flow statement. 49

Accounting for Non-for-Profit Organisations (a)

Unrestricted Funds', further sub-classified into Designated Funds' and General Fund'; Res ricted Funds'; and Total' column reflecting the total income and expenses of Unrestric ted Funds' and Restricted Funds'. (b) (c) 106. Although an NPO may separate designated funds from other unrestricted funds in its internal accounting records as mentioned above, care must be taken in th e published accounts so as not to give the impression that there is some legal d istinction between the two, as in fact the NPO can use both types of funds at it s discretion. If the trustees/management do wish to highlight the fact that they are setting aside resources for a specific project or purpose, the designated f unds may be disclosed as a separate category of unrestricted funds. 107. NPOs sh ould not present the balance sheet in multi-columnar form. An integrated balance sheet for the NPO as a whole should be presented. In the balance sheet, assets and liabilities should not be set-off against each other, even though these may be related to the same programme/project. Rather these should be disclosed separ ately. Balance of various funds should be distinctly disclosed in the balance sh eet. 108. In the preparation and presentation of financial statements, the overa ll consideration should be that they give a true and fair view of the state of a ffairs of the NPO and of the surplus or deficit as reflected in the balance shee t and the income and expenditure account, respectively. The financial statements should disclose every material transaction, including transactions of an except ional and extraordinary nature. The financial statements should be prepared in c onformity with relevant statutory requirements, the accounting standards and oth er recognised accounting principles and practices. 109. NPOs incorporated under section 25 of the Companies Act, 1956, are governed by the provisions of the sai d Act. Under the 50

Accounting for Non-for-Profit Organisations Act, these NPOs are required to follow the Accounting Standards issued by the In stitute of Chartered Accountants of India and to prepare balance sheet and profi t and loss account (income and expenditure account in case of companies not carr ying business for profit) in the formats set out in Schedule VI to the Act, or a s near thereto as circumstances admit. NPOs which are not registered under the C ompanies Act but the statute which governs them prescribes a format for the purp ose of preparation of the financial statements, should prepare the financial sta tements in accordance with the requirements of the said statute. The Accounting Standards should also be followed by such NPOs as are already discussed in this Technical Guide. For use by NPOs, which are not governed by any statute or for w hich the governing statute does not prescribe any formats, illustrative formats of financial statements are given in the Appendix I. It may be emphasised that f ormats given in the Appendix are merely illustrative and an NPO may modify the f ormats appropriately keeping in view the nature of activities, requirements of d onor agencies, etc. The formats should be viewed as laying down the minimum rath er than the maximum information that NPOs should present in their financial stat ements. Those NPOs who wish to present more detailed information are encouraged to do so. FUND BASED ACCOUNTING 110. NPOs frequently receive grants/donations and other forms of revenue the use of which may be either unrestricted or subject to the restrictions imposed by t he contributors, i.e., such funds can only be used for specific purposes and, th erefore, are not available for an NPO's general purposes. Further, there might als o be legal/ other binding restrictions on NPOs to use certain specific amounts o nly for specified purposes or NPOs may also on their own, earmark certain unrest ricted funds for specific purposes. For the purpose of appropriate presentation of these funds in the financial statements, it is necessary to understand their nature and characteristics, which is described below: (a) Unrestricted funds: Un restricted funds refer to funds contributed to an NPO with no specific restricti ons. The obligation of an NPO while accepting an unrestricted 51

Accounting for Non-for-Profit Organisations donation or grant is to ensure its usage for the general purposes of the NPO. Al l incomes (donations, legacies, investment income, fees, etc.) not subject to ex ternal restrictions are a part of unrestricted funds. For the purpose of present ation in the income and expenditure account and the balance sheet the unrestrict ed funds can be further classified into three categories viz., corpus, designate d funds and general fund. (i) Corpus: Corpus refers to funds contributed by foun ders/promoters generally to start the NPO. They are non-reducible funds which ca n however be increased by additional contribution by the founders/ promoters to further the objects of the NPO. These funds need to be distinguished from funds which are in the nature of founders'/promoters' contribution, which are grants given by contributors other than founders/promoters with reference to the total inves tment in an undertaking or by way of contribution towards outlay. No repayment i s ordinarily expected of such grants. (ii) Designated funds: Designated funds are unrestricted funds which have been s et aside by the trustees/ management of an NPO for specific purposes or to meet future commitments. Unlike restricted funds, any designations are self-imposed a nd are not normally legally binding. The NPO can lift the designation whenever i t wishes and reallocate the funds to some other designated purpose. (iii) Genera l fund: Unrestricted funds other than designated funds' and corpus' are a part of the G eneral Fund'. (b) Restricted funds: Restricted funds are subject to certain condit ions set out by the contributors and agreed to by the NPO when accepting the con tributions. The restriction may apply to the use of the moneys received 52

Accounting for Non-for-Profit Organisations or income earned from the investment of such moneys or both. Funds, the use of w hich is subject to legal restrictions are also considered as restricted funds. E ndowment funds are another form of restricted funds. Endowment funds are those f unds which have been received with a stipulation from the contributor/donor that the amount received should not be used for any purpose. Only the income earned from these funds can be used either for general purposes of the NPO or for speci fic purposes, depending on the terms of the contribution made. Usually, the amou nt received is invested outside the NPO as per the terms of the contribution, if any. 111. Designated funds are created by appropriation of the surplus for the year for meeting a revenue expenditure or capital expenditure in future. When a revenue expenditure is incurred with respect to a designated fund, the same is d ebited to the income and expenditure account (Designated Funds' column). A correspo nding amount is transferred from the concerned designated fund account to the cr edit of the income and expenditure account after determining the surplus/deficit for the year since the purpose of the designated fund is over to that extent. W here the designated fund has been created for meeting a capital expenditure, the relevant asset account is debited by the amount of such capital expenditure and a corresponding amount is transferred from the concerned designated fund accoun t to the credit of the income and expenditure account after determining surplus/ deficit for the year. In respect of the assets, e.g., a building, being construc ted by an NPO, on completion of the same, the entire balance, if any, of the rel evant designated fund is transferred to the credit of the income and expenditure account after determining the surplus/ deficit for the year. 112. In case an NP O holds specific investments against the designated funds, income earned, if any , on such investments, is credited to the income and expenditure account for the year in which the income is so earned and is shown in Designated Funds' 53

Accounting for Non-for-Profit Organisations column. An equivalent amount may be transferred to the concerned designated fund account after determining the surplus/deficit for the year as per the policy of the NPO. 113. All items of revenue and expenses that do not relate to any desig nated fund or restricted fund are reflected in the General Fund' column of the inco me and expenditure account. The surplus/ deficit for the year after appropriatio ns is transferred and presented as surplus/deficit separately as a part of Genera l Fund' in the balance sheet. Apart from such surplus/deficit, the General Fund' also includes the following which are separately presented in the balance sheet: (a) Grants related to a non-depreciable asset. (See Grants and Donations Recognitio n and Measurement) Grants of the nature of founders'/promoters' contribution. (See G rants and Donations Recognition and Measurement) (b) 114. Restricted funds, that represent the contributions received the use of whic h is restricted by the contributors, are credited to a separate fund account whe n the amount is received and reflected separately in the balance sheet. Such fun ds may be received for meeting revenue expenditure or capital expenditure. Where the fund is meant for meeting revenue expenditure, upon incurrence of such expe nditure, the same is charged to the income and expenditure account (Restricted Fu nds' column); a corresponding amount is transferred from the concerned restricted fund account to the credit of the income and expenditure account (Restricted Fund s' column). Where the fund is meant for meeting capital expenditure, upon incurren ce of the expenditure, the relevant asset account is debited which is depreciate d as per AS 6. Thereafter, the concerned restricted fund account is treated as d eferred income, to the extent of the cost of the asset, and is transferred to th e credit of the Income and Expenditure Account in proportion to the depreciation charged every year (both the income so transferred and the depreciation should be shown in the Restricted Funds' column). The unamortised balance of deferred inco me would 54

Accounting for Non-for-Profit Organisations continue to form part of the restricted fund. Any excess of the balance of the c oncerned restricted fund account over and above the cost of the asset may have t o be refunded to the donor. In case the donor does not require the same to be re funded, it is treated as income and credited to the income and expenditure accou nt pertaining to the relevant year (General Fund' column). Where the restricted fun d is in respect of a non-depreciable asset, the concerned restricted fund accoun t is transferred to the General Fund' in the balance sheet when the asset is acquir ed. 115. The restricted funds will normally carry a stipulation as to the use of income earned on investments made out of the contributions received. If the ter ms stipulate that the income earned should be used for the same purpose for whic h the contribution was made, the income earned should be credited to the concern ed restricted fund account. Where the terms stipulate a general use of the incom e earned, the same should be credited to the income and expenditure account (Gene ral Fund' column) of the year in which the income is so earned. 116. With regard t o endowment funds, the income earned from investments of these funds is recognis ed in the income and expenditure account only to the extent of the expenditure i ncurred for the relevant purpose. Both the income and the expense should be show n in the Restricted Funds' column. Any excess of the income not recognised as afore said would continue to remain part of the concerned fund. DISCLOSURES 117. Accounting Standard (AS) 1, Disclosure of Accounting Policies, principally requires the disclosure of significant accounting policies and specifies the man ner of their disclosure. A clear statement of significant accounting policies fo llowed in the preparation and presentation of financial statements is necessary, irrespective of the type of entity presenting the financial statements. Further , all significant accounting policies should be disclosed at one place. Accordin gly, NPOs should disclose their significant 55

Accounting for Non-for-Profit Organisations accounting policies and this disclosure should be made at one place. 118. Where an NPO has followed a basis of accounting other than accrual, a disclosure in th is regard should be made. An illustrative list of accounting policies that an NP O could disclose is as follows: (a) The bases of recognition of major types of e xpenses and revenue Accounting for income from and expenditure on specialised ac tivities such as research Conversion or translation of foreign currency (in case of organisations receiving foreign funds) Method(s) of depreciation Valuation o f inventories Valuation of investments Treatment of employee benefits Valuation of fixed assets Treatment of contingent liabilities (b) (c) (d) (e) (f) (g) (h) (i) 119. As per Accounting Standard (AS) 2, Valuation of Inventories, an NPO should disclose in the financial statements: (a) the accounting policies adopted in mea suring inventories, including the cost formula used; and the total carrying amou nt of inventories and its classification appropriate to the NPO. (b) 56

Accounting for Non-for-Profit Organisations 120. As per Accounting Standard (AS) 9, Revenue Recognition, in addition to the disclosures required by AS 1, an NPO should also disclose the circumstances in w hich revenue recognition has been postponed pending the resolution of significan t uncertainties. 121. As per Accounting Standard (AS) 6, Depreciation Accounting , an NPO should disclose in the financial statements: (a) the historical cost or other amount substituted for historical cost of each class of depreciable asset s; total depreciation for the period for each class of assets; and the related a ccumulated depreciation. (b) (c) 122. The following information should also be disclosed in the financial stateme nts alongwith the disclosure of other accounting policies: (a) (b) depreciation methods used; and depreciation rates or the useful lives of the assets, if they are different from the principal rates specified in the statute governing the NP O. 123. As per Accounting Standard (AS) 10, Accounting for Fixed Assets, an NPO sho uld make the following disclosures in the financial statements: (a) gross and ne t book values of fixed assets at the beginning and end of the accounting period along with additions, disposals, acquisitions and other movements during the yea r; expenditure incurred on account of fixed assets in the course of construction or acquisition; and (b) 57

Accounting for Non-for-Profit Organisations (c) revalued amounts substituted for historical costs of fixed assets, the method ad opted to compute the revalued amounts, the nature of any indices used, the year of any appraisal made, and whether an external valuer was involved in carrying o ut the revaluation. 124. As per Accounting Standard (AS) 11, The Effects of Changes in Foreign Excha nge Rates, an NPO should make the following disclosures in its financial stateme nts: (a) the amount of exchange differences included in the net profit or loss f or the period; and net exchange differences accumulated in foreign currency tran slation reserve as a separate component of shareholders' funds, and a reconciliati on of the amount of such exchange differences at the beginning and end of the pe riod. (b) 125. As per Accounting Standard (AS) 12, Accounting for Government Grants, an NP O should make the following disclosures in the financial statements: (a) The acc ounting policy adopted for government grants, including the methods of presentat ion in the financial statements. The nature and extent of government grants reco gnised in the financial statements, including grants of nonmonetary assets given at a concessional rate or free of cost. (b) These disclosures are also required to be made in respect of donations and other grants received by an NPO. 126. As per Accounting Standard (AS) 13, Accounting for Investments, an NPO should make the following disclosures in the financial s tatements: 58

Accounting for Non-for-Profit Organisations (a) the accounting policies for the determination of carrying amount of investments; classification of investments; the amounts included in income and expenditure a ccount for: (i) interest, dividends (showing separately dividends from subsidiar y companies), and rentals on investments showing separately such income from lon g term and current investments; (b) (c) (ii) profits and losses on disposal of current investments and changes in the ca rrying amount of such investments; and (iii) profits and losses on disposal of l ong term investments and changes in the carrying amount of such investments; (d) significant restrictions on the right of ownership, realisability of investment or the remittance of income and proceeds of disposal; the aggregate amount of q uoted and unquoted investments, giving the aggregate market value of quoted inve stments; other disclosures as specifically required by the relevant statute gove rning the enterprise. (e) (f) 127. As per Accounting Standard (AS) 17, Segment Reporting, an NPO that is opera ting in different geographical locations or is involved in different kinds of se rvice delivery programmes/projects which meet the definitions of geographical seg ment' and business segment', should disclose segmental information according to the r equirements of AS 17. However, small and medium sized NPOs 59

Accounting for Non-for-Profit Organisations falling within the meaning of SMEs/SMCs need not follow this Standard. 128. Acco unting Standard (AS) 18, Related Party Disclosures, establishes the requirements for disclosure of related party relationships, and transactions between a repor ting enterprise and its related parties. Related party parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other par ty in making financial and/or operating decisions. Related party transaction is a transfer of resources or obligations between related parties, regardless of wh ether or not a price is charged. 129. Without the related party disclosures, the re is a general presumption that transactions reflected in financial statements are consummated on an arm's-length basis between independent parties. NPOs are res ponsible to a number of stakeholders and in this context related party disclosur es assume prime importance. Related party transactions may adversely affect the expectations of stakeholders, and furthermore, disclosing transactions between r elated parties also enhances transparency, accountability, and fairness. NPOs sh ould, therefore, disclose the related party relationships and transactions in ac cordance with the requirements of AS 18. Some of the examples of related party t ransactions are as follows: (a) (b) (c) (d) (e) sale, purchase, and transfer of property; services received or provided; property and equipment leases; borrowin g or lending, including guarantees; and receipt of salary, honorarium or any oth er monetary or non-monetary benefits. 60

Accounting for Non-for-Profit Organisations 130. For the purposes of AS 18, trustees of an NPO would be considered as key ma nagement personnel and, accordingly, trustees and their relatives would, inter a lia, be treated as related parties. It may be noted that according to AS 18, rel ative, in relation to an individual, means the spouse, son, daughter, brother, s ister, father and mother who may be expected to influence, or be influenced by, that individual in his/her dealings with the reporting enterprise.Where an NPO f alls in Level III category of non-corporate entities, it is exempted from meetin g the requirements of AS 18. However, due to the heavy implications of related p arty transactions on the functioning of an NPO, it is recommended that the discl osures required in AS 18 should be made by all NPOs. 131. As per Accounting Stan dard (AS) 26, Intangible Assets, with regard to intangible assets, an NPO should disclose in the financial statements the following for each class of intangible assets, distinguishing between internally generated intangible assets and other intangible assets: (a) (b) (c) the useful lives or the amortisation rates used; the amortisation methods used; the gross carrying amount and the accumulated am ortisation (aggregated with accumulated impairment losses) at the beginning and end of the period. 132. An NPO should also disclose in the financial statements: (a) if an intangib le asset is amortised over more than ten years, the reasons why it is presumed t hat the useful life of an intangible asset will exceed ten years from the date w hen the asset is available for use. In giving these reasons, the NPO should desc ribe the factor(s) that played a significant role in determining the useful life of the asset; a description, the carrying amount and remaining amortisation per iod of any individual intangible asset 61 (b)

Accounting for Non-for-Profit Organisations that is material to the financial statements of the NPO as a whole; (c) the exis tence and carrying amounts of intangible assets whose title is restricted and th e carrying amounts of intangible assets pledged as security for liabilities; and the amount of commitments for the acquisition of intangible assets. (d) The financial statements of an NPO should also disclose the aggregate amount of research and development expenditure recognised as an expense during the period. 133. Accounting Standard (AS) 27, Financial Reporting of Interests in Joint Ven tures, sets out principles and procedures for accounting for interests in joint ventures and reporting of joint venture assets, liabilities, income and expenses in the financial statements of venturers and investors. In case of NPOs, there may be instances where two or more NPOs jointly undertake or fund a certain proj ect or activity which is considered as a jointly controlled operation. Similarly , two or more NPOs may jointly control an asset. In addition, an NPO may also ha ve joint control in a jointly controlled entity with other enterprises that may be in any form of organisation. Accordingly, in such cases, NPOs should report t heir interests in such joint ventures in separate as well as in the consolidated financial statements (prepared as per AS 21) in accordance with the requirement s of AS 27. 134. In respect of the funds created in the financial statements, th e NPO should disclose the following in the schedules/notes to accounts: (a) In r espect of each major fund, opening balance, additions during the period, deducti ons/utilisation during the period and balance at the end; Assets, such as invest ments, and liabilities related to each fund separately; 62 (b)

Accounting for Non-for-Profit Organisations (c) Restrictions, if any, on the utilisation of each fund balance; Restrictions, if any, on the utilisation of specific assets. (d) 135. NPOs should also disclose the following in the Notes to accounts: (a) Detai ls of the services rendered by volunteers for which no payment has been made; Fa ir value of the non-monetary grants and donations, e.g., a fixed asset received free of cost, received during the year. The quantitative details of such grants and donations should be separately disclosed; and Fair values of all the assets, received as non-monetary grants, existing on the balance sheet date, should be separately disclosed. If it is not practicable to determine the fair values of t he assets on each balance sheet date, then such values may be determined after a suitable interval, say, every three years, and disclose the date of determinati on, along with the fair values. The fair value of an asset would normally be the market price in an active, liquid and freely accessible market. The market pric e of an item can be the purchase price of the item donated, where the proof of p urchase price is available, e.g., the donor has provided the invoice received fr om the supplier, declaration for customs duty purposes where the assets have bee n received from abroad, etc. In case the market price of the asset is not availa ble then market price of a comparable asset may be used as fair value. It is rec ommended that the method of determination of fair value is also disclosed. (b) (c) 63

Accounting for Non-for-Profit Organisations TRANSITION TO ACCRUAL BASIS OF ACCOUNTING 136. A major problem in transition from cash basis of accounting to accrual basi s of accounting is the determination of opening balances of assets and liabiliti es. 137. Many assets, e.g., those received by way of donations or gifts, may not have been recorded at the time they were acquired. It is necessary to identify such assets and account for them appropriately. In every case where the original cost cannot be ascertained, without unreasonable expense or delay, the valuatio n shown by the books should be considered. For the purpose of this paragraph, su ch valuation should be the net amount at which an asset stood in the NPOs' books a t the commencement of the application of this Technical Guide after deduction of the amounts previously provided or written off for depreciation. Similarly, the opening balances of current assets like, receivables and loans and advances, sh ould also be determined. 138. In the case of liabilities, the NPOs should make a n assessment on the basis of records available of the amounts payable to credito rs, suppliers and others in respect of expenditure incurred for acquisition of a ssets or to meet revenue expenses. 139. In a manner similar to the above, the ba lances on account of the various funds including unrestricted and restricted sho uld be determined and reflected on the liability side of the balance sheet. 140. The difference, if any, between the total debit balances and the credit balance s as determined on the basis of the paragraphs above, should be taken as the bal ance of the General Fund'. 141. Accounting policies should be applied consistently from one financial year to the next. Any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. As per Accounting S tandard 5, Net profit or 64

Accounting for Non-for-Profit Organisations loss for the period, prior period items and changes in accounting policies', in ca se of a change in accounting policies which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change, should also be disclosed to the extent ascertainable. Where such a mount is not ascertainable, wholly or in part, the fact should be indicated. 65

Accounting for Non-for-Profit Organisations Appendix I ILLUSTRATIVE FORMATS FOR FINANCIAL STATEMENTS Part I General Instructions and Ac counting Principles 1. The financial statements of NPOs (viz., balance sheet and income and expendit ure account) should be prepared on accrual basis. 2. A statement of all signific ant accounting policies adopted in the preparation and presentation of the balan ce sheet and the income and expenditure account should be included in the NPO's ba lance sheet. Where any of the accounting policies is not in conformity with Acco unting Standards, , and the effect of departures from Accounting Standards is ma terial, the particulars of the departure should be disclosed, together with the reasons therefor and also the financial effect thereof except where such effect is not ascertainable. 3. Accounting policies should be applied consistently from one financial year to the next. Any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In case of a change in accounting policies which has a material effect in the current period, the amoun t by which any item in the financial statements is affected by such change, shou ld also be disclosed to the extent ascertainable. Where such amount is not ascer tainable, wholly or in part, the fact should be indicated. 4. The accounting tre atment and presentation in the balance sheet and the income and expenditure acco unt of transactions and events should be governed by their substance and not mer ely by the legal form. 66

Accounting for Non-for-Profit Organisations 5. In determining the accounting treatment and manner of disclosure of an item i n the balance sheet and/or the income and expenditure account, due consideration should be given to the materiality of the item. 6. Notes to the balance sheet a nd the income and expenditure account should contain the explanatory material pe rtaining to the items in the balance sheet and the income and expenditure accoun t. 7. If the information required to be given under any of the items or sub-item s in these formats cannot be conveniently included in the balance sheet or the i ncome and expenditure account itself, as the case may be, it can be furnished in a separate schedule or schedules to be annexed to and forming part of the balan ce sheet or the income and expenditure account. This is recommended where items are numerous. 8. The schedules referred to above, accounting policies and explan atory notes should form an integral part of the financial statements. 9. The cor responding amounts for the immediately preceding financial year for all items sh own in the balance sheet and the income and expenditure account should also be g iven in the balance sheet or income and expenditure account, as the case may be. 10. A cash flow statement should be annexed to the balance sheet, wherever appl icable, showing cash flows during the period covered by the income and expenditu re account and during the corresponding previous period. 11. Disclosures as sugg ested in the formats are minimum requirements. An NPO is encouraged to make addi tional disclosures. 67

Accounting for Non-for-Profit Organisations Part II Balance Sheet FUNDS EMPLOYED UNRESTRICTED FUNDS Corpus General Fund (i) Funds in the nature of founders'/ promoters' contribution Corpus refers to funds contributed by founders/p romoters of the NPO. General Fund includes all financial resources except those required to be accounted for in another fund, i.e., it includes funds which neit her have any restriction on their use nor have been designated for any specific purpose. The balance, if any, in the income and expenditure account after approp riation, i.e., surplus/(deficit) is transferred to this fund. Grants and donatio ns relating to nondepreciable assets, e.g., freehold land, which do not require fulfillment of any obligation, are included under this head. (ii) Funds related to non-depreciable assets not requiring fulfillment of any obligat ion Surplus/(Deficit) (iii) Surplus/(Deficit)' represents the balance of income and expenditure account, after appropriations, if any. Designated/Earmarked funds are unrestricted funds set as ide by the NPO for specific purposes or to meet specific future commitments. Res tricted funds are funds subject to certain conditions set out by the contributor s and agreed to by the 68 Designated Funds RESTRICTED FUNDS

Accounting for Non-for-Profit Organisations NPO when accepting the contribution or are funds subject to certain legal restri ctions. This head includes: (i) Endowment funds that are received with the stipu lation that only the income earned can be used, either for the general purposes of NPO or for specific purposes Funds related to depreciable/nondepreciable asse ts in respect of which assets are still to be acquired Balances of deferred inco me, e.g., grants and donations in respect of which specific depreciable assets h ave been acquired Funds related to specific items of revenue expenditure not yet incurred (ii) (iii) (iv) Each restricted fund should be reflected separately either on the face of the ba lance sheet or in the schedule(s) to the balance sheet. Notes: 1. The following particulars should be shown in respect of Surplus/ (Deficit): Balance at the beg inning of the year 69

Accounting for Non-for-Profit Organisations Add: Excess of income over expenditure for the year after appropriations, if any . Less: Excess of expenditure over income for the year after appropriations, if any. Balance at the end of the year 2. The following particulars should be shown in respect of each Designated and Restricted Fund: (a) Balance at the beginning of the year (b) Additions during the year (c) Deductions during the year (d) Ba lance at the end of the year 3. Designated/Restricted Funds represented by speci fically earmarked bank balances/ investments should be disclosed separately in r espect of each fund. LOANS, if any Notes: 1. Loans, if any, should be classified as secured' and unsecured' on the basis of the fact whether these are secured or not, wholly or partly, against an asset of the NPO. 70

Accounting for Non-for-Profit Organisations 2. Loans, if any, should also be classified on the basis of due date into the follo wing categories: (a) Loans repayable within 12 months (b) Loans repayable within 1 to 5 years (c) Loans repayable after 5 years 3. Interest free loans should be disclosed separately from interest bearing loans. Interest accrued and due on loans should be included under the appropriate sub-h eads. REPRESENTED BY FIXED ASSETS Land Buildings Includes freehold land and leasehold land. Include office and works buildings, residential buildings, school and coll ege buildings, hospital buildings, public buildings, temporary structures and sh eds. Include air conditioners, generator sets, television sets, fire extinguishe rs, etc. Include buses, lorries, vans, cars, scooters, etc. Include such items a s fax machines, photocopiers, EPABX, typewriters, duplicating machines, etc. Plant and machinery Vehicles Office equipments Computers Furniture fixtures and 71

Accounting for Non-for-Profit Organisations fittings, and electrical appliances Furniture Fixtures and fittings, and electri cal appliances Intangible assets Livestock Other fixed assets Includes items such as cabinets, almirahs, tables, chairs and partitions Include electrical fixtures and fittings such as fans, bulbs and tubelights and electri cal appliances such as airconditioners, water and air coolers, etc. Includes com puter software purchased, patents, trade marks etc. Notes: 1. Under each head, t he original cost, the additions thereto and deductions there from during the yea r, depreciation written off or provided during the year, and the total depreciat ion written off or provided up to the end of the year should be stated. 2. (a) T he cost of a fixed asset should be determined by adding to the purchase price an y attributable costs of bringing it to its working condition for its intended us e. (b) The cost of construction of a fixed asset should be determined by adding to the purchase price of the materials and consumables used, the costs incurred by the NPO which are attributable to the construction of that asset. 3. Advance payments to contractors and suppliers should not be classified under the specifi c fixed 72

Accounting for Non-for-Profit Organisations assets but disclosed as a separate item. 4. Separate disclosure under each of th e above heads should be made in respect of donated assets (i.e., assets that hav e been received free of cost as nonmonetary grant/donation by the NPO) and asset s financed under a lease agreement. Fair value and quantitative details of fixed assets received, as nonmonetary grants and donations, during the year, should b e disclosed in the notes to accounts. Fair values of all the donated fixed asset s, existing on the balance sheet date, should be disclosed in the notes to accou nts. If it is not practicable to determine the fair values of the assets on each balance sheet date, then such values may be determined after a suitable interva l, say, every three years. In such a case, date of determination of fair values should also be disclosed along with the fair values of assets. Restrictions, if any, on the utilisation of each asset should also be disclosed in the notes to a ccounts. 5. 6. 7. 73

Accounting for Non-for-Profit Organisations CAPITAL WORK-INPROGRESS INVESTMENTS Long-term Capital expenditure on incomplete construction work should be shown under this h ead. Long-term investment' means an investment other than a current investment. Central Government Securities State Government Securities Other Securities Notes : 1. Long-term investments should be shown at cost. The book value of long-term investments should be reduced to recognise a decline, other than temporary, in t heir value. Such reduction should be determined and made for each investment ind ividually. Aggregate amount of the NPO's long-term quoted investments and also the market value thereof should be shown. Aggregate amount of the NPO's unquoted inve stments should also be shown. Quoted investment' for this purpose, means an investm ent in respect of which a quotation or permission to deal on a recognised stock exchange has been granted, and the expression unquoted investment' should be constr ued accordingly. 74 2. 3.

Accounting for Non-for-Profit Organisations Current Investments Current investment' means an investment that is by its nature readily realisable an d is intended to be held for not more than one year from the date on which such investment is made. Central Government Securities State Government Securities Other Securities Note: Current investments should be shown at the lower of cost and fair value, which should be determined either on an individual investment basis or by category of investment. If the net realisable value of any current asset, except items held for distributing either free of cost or at a nominal amount, is lower than its b ook value, the amount to be included in respect of that asset should be the net realisable value. Includes items that are held for sale in the ordinary course o f business, in the process of production for such sale, or in the form of materi als or supplies to be consumed in the production process or in the rendering of services. Notes: (i) Items held for sale in the ordinary course of business shou ld be valued at the CURRENT ASSETS Closing stock 75

Accounting for Non-for-Profit Organisations lower of cost and net realisable value. (ii) Items held for distribution free of cost or at a nominal amount, should be shown separately. Such items should be v alued at lower of cost and replacement cost, if available. Fair values of items received as non-monetary grants and donations, existing on the balance sheet dat e, should be disclosed in notes to accounts. (iii) Receivables Donations and grants receivable Include donations and grants in respect of which there is reasonable assurance t hat (i) the NPO will comply with the condition attached, and (ii) the donations and grants will be received. Note: Receivables outstanding for (i) upto six mont hs, (ii) more than six months and upto one year, and (iii) more than one year, s hould be shown separately under respective heads. Others (Please specify) Balances with Banks and Post Office With Scheduled Banks With Non-scheduled Bank s Particulars should be given of balances lying on current accounts, call accounts and deposit accounts. 76

Accounting for Non-for-Profit Organisations With Post Office Cash Balances Include cheques, drafts and pay orders on hand. N otes: Items such as interest accrued on investments should be included under thi s head. Where any item constitutes ten percent or more of total current assets, the nature and amount of such item may be shown separately. LOANS, ADVANCES AND DEPOSITS Advances to staff Interest bearing Non-interest bearing Advances to sup pliers/ contractors Advances in cash to contractors for capital works Advances i n cash to contractor/suppliers for other works Material issued contractors to Other Current Assets 77

Accounting for Non-for-Profit Organisations Advances in cash for services Advances to others Other amounts recoverable in ca sh or kind or for value to be received Prepaid expenses Deposits (other than wit h banks) Telephone Electricity Others Where any item constitutes ten per cent or more of total loans, advances and deposits, the nature and amount of such item may be shown separately and the same may not be included under this head. LESS: CURRENT LIABILITIES AND PROVISIONS Current Liabilities Creditors For Goods For Services For Statutory Liabilities 78

Accounting for Non-for-Profit Organisations Donations and Grants in advances Expenses Payable Other Current Liabilities Wher e any item constitutes ten per cent or more of total current liabilities and pro visions, the nature and amount of such item may be shown separately and the same may not be included under this head. Provisions For retirement benefits For leave encashment For contingencies Others (specify) 79

Accounting for Non-for-Profit Organisations Part III Instructions for Preparing Income and Expenditure Account 1. The income and expenditure account should disclose every material feature and should be so made out as to clearly disclose the result of the working of the N PO during the period covered by the account. 2. Donations and grants should be r ecognised only at a stage when there is a reasonable assurance that: the NPO wil l comply with the conditions attached, and the donations and grants will be rece ived. 3. Any item under which income exceeds 1 per cent of the total turnover/gr oss income of the NPO or Rs. 5,000/-, whichever is higher, should be shown as a separate and distinct item against an appropriate account head in the income and expenditure account. These items, therefore, should not be shown under the head miscellaneous income'. 4. Any item under which expenses exceed 1 per cent of the t otal turnover/gross income of the NPO or Rs. 5,000/-, whichever is higher, shoul d be shown as a separate and distinct item against an appropriate account head i n the income and expenditure account. These items, therefore, should not be show n under the head miscellaneous expenses'. 5. Depreciation should be provided so as to charge the depreciable amount of a depreciable asset over its useful life. 6. Fair value and quantitative details of items, being sold or being distributed f ree of cost or at nominal amount, that have been received as non-monetary grants and donations, should be disclosed as below, in the notes to accounts: Balance at the beginning of the year 80

Accounting for Non-for-Profit Organisations Add: Receipts during the year Less: Distribution during the year Sale during the year Balance at the end of the year 81

Accounting for Non-for-Profit Organisations Part IV Income and Expenditure Account Particulars March 31, 2010 Unrestricted Funds Restricted Total General Designate d Funds Fund Funds March 31, 2009 Total INCOME Donations and Grants Fees from Activities Income from sale of items such as publications Other Income Interest and dividends Profit on sale of investment s and fixed assets Miscellaneous income Excess of Expenditure over Income for th e year EXPENDITURE Materials consumed (a) Opening balance (b) Add: Purchases (c) Less: Closing balance Staff Payments & Benefits Salary, wages and bonus Allowan ces Reimbursements Employee welfare Terminal benefits Other employee costs Admin istrative & General Expenses Rents, rates and taxes Communication expenses Print ing & stationery Electricity 82

Accounting for Non-for-Profit Organisations Particulars March 31, 2010 Unrestricted Funds Restricted Total General Designated Funds Fund Funds March 31, 2009 Total Travelling & conveyance expenses Insurance charges Remuneration to auditors Othe rs Repairs & Maintenance Buildings Plant & Maintenance Furniture & Fixtures Othe rs Depreciation Financial Expenses such interest on loans Other Expenses Write o ffs and provisions Miscellaneous expenses Loss on sale of investments and fixed assets Excess of Income over Expenditure for the year Appropriations Transfers t o funds, e.g., Building fund Transfers from funds 83

Accounting for Non-for-Profit Organisations Appendix II APPLICABILITY OF ACCOUNTING STANDARDS (1) Criteria for classification of non-cor porate entities as decided by the Institute of Chartered Accountants of India Le vel I Entities Non-corporate entities which fall in any one or more of the following categories , at the end of the relevant accounting period, are classified as Level I entiti es: (i) Entities whose equity or debt securities are listed or are in the proces s of listing on any stock exchange, whether in India or outside India. Banks (in cluding co-operative banks), financial institutions or entities carrying on insu rance business. All commercial, industrial and business reporting entities, whos e turnover (excluding other income) exceeds rupees fifty crore in the immediatel y preceding accounting year. All commercial, industrial and business reporting e ntities having borrowings (including public deposits) in excess of rupees ten cr ore at any time during the immediately preceding accounting year. Holding and su bsidiary entities of any one of the above. (ii) (iii) (iv) (v) Level II Entities (SMEs) Non-corporate entities which are not Level I entities but fall in any one or mor e of the following categories are classified as Level II entities: 84

Accounting for Non-for-Profit Organisations (i) All commercial, industrial and business reporting entities, whose turnover (excl uding other income) exceeds rupees forty lakh but does not exceed rupees fifty c rore in the immediately preceding accounting year. All commercial, industrial an d business reporting entities having borrowings (including public deposits) in e xcess of rupees one crore but not in excess of rupees ten crore at any time duri ng the immediately preceding accounting year. Holding and subsidiary entities of any one of the above. (ii) (iii) Level III Entities (SMEs) Non-corporate entities which are not covered under Level I and Level II are cons idered as Level III entities. Additional requirements (1) An SME which does not disclose certain information pursuant to the exemptions or relaxations given to it should disclose (by way of a note to its financial statements) the fact that it is an SME and has complied with the Accounting Standards insofar as they are applicable to entities falling in Level II or Level III, as the case may be. (2) Where an entity, being covered in Level II or Level III, had qualified for any exemption or relaxation previously but no longer qualifies for the relevant exem ption or relaxation in the current accounting period, the relevant standards or requirements become applicable from the current period and the figures for the c orresponding period of the previous accounting period need not be revised merely by reason of its having ceased to be covered in Level II or Level III, as the c ase may be. The fact that the entity was covered in Level II or Level III, as th e case may be, in the previous period and it had availed of the exemptions or re laxations available to that Level of entities should be disclosed in the notes t o the financial statements. 85

Accounting for Non-for-Profit Organisations (3) Where an entity has been covered in Level I and subsequently, ceases to be s o covered, the entity will not qualify for exemption/relaxation available to Lev el II entities, until the entity ceases to be covered in Level I for two consecu tive years. Similar is the case in respect of an entity, which has been covered in Level I or Level II and subsequently, gets covered under Level III. (4) If an entity covered in Level II or Level III opts not to avail of the exemptions or relaxations available to that Level of entities in respect of any but not all of the Accounting Standards, it should disclose the Standard(s) in respect of whic h it has availed the exemption or relaxation. (5) If an entity covered in Level II or Level III desires to disclose the information not required to be disclosed pursuant to the exemptions or relaxations available to that Level of entities, it should disclose that information in compliance with the relevant Accounting S tandard. (6) An entity covered in Level II or Level III may opt for availing cer tain exemptions or relaxations from compliance with the requirements prescribed in an Accounting Standard, provided that such a partial exemption or relaxation and disclosure should not be permitted to mislead any person or public. (7) In r espect of Accounting Standard (AS) 15, Employee Benefits, exemptions/relaxations are available to Level II and Level III entities, under two sub-classifications , viz., (i) entities whose average number of persons employed during the year is 50 or more, and (ii) entities whose average number of persons employed during t he year is less than 50. The requirements stated in paragraphs (1) to (6) above, mutatis mutandis, apply to these subclassifications. (2) Criteria for classification of companies under the Companies (Accounting Sta ndards) Rules, 2006 86

Accounting for Non-for-Profit Organisations Small and Medium-Sized Company (SMC) as defined in Clause 2(f) of the Companies (Accounting Standards) Rules, 2006: Small and Medium Sized Company (SMC) means, a company(i) whose equity or debt secu rities are not listed or are not in the process of listing on any stock exchange , whether in India or outside India; which is not a bank, financial institution or an insurance company; whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding accounting year; which does not have borrowings (including public deposits) in excess of rupees ten crore at an y time during the immediately preceding accounting year; and which is not a hold ing or subsidiary company of a company which is not a small and medium-sized com pany. (ii) (iii) (iv) (v) Explanation: For the purposes of clause (f), a company shall qualify as a Small and Medium Sized Company, if the conditions mentioned therein are satisfied as a t the end of the relevant accounting period. Non-SMCs Companies not falling within the definition of SMC are considered as Non-SMCs. 87

Accounting for Non-for-Profit Organisations Instructions A. General Instructions 1. SMCs shall follow the following instructions while co mplying with Accounting Standards under these Rules:1.1 the SMC which does not d isclose certain information pursuant to the exemptions or relaxations given to i t shall disclose (by way of a note to its financial statements) the fact that it is an SMC and has complied with the Accounting Standards insofar as they are ap plicable to an SMC on the following lines: The Company is a Small and Medium Size d Company (SMC) as defined in the General Instructions in respect of Accounting Standards notified under the Companies Act, 1956. Accordingly, the Company has c omplied with the Accounting Standards as applicable to a Small and Medium Sized Company. 1.2 Where a company, being an SMC, has qualified for any exemption or re laxation previously but no longer qualifies for the relevant exemption or relaxa tion in the current accounting period, the relevant standards or requirements be come applicable from the current period and the figures for the corresponding pe riod of the previous accounting period need not be revised merely by reason of i ts having ceased to be an SMC. The fact that the company was an SMC in the previ ous period and it had availed of the exemptions or relaxations available to SMCs shall be disclosed in the notes to the financial statements. If an SMC opts not to avail of the exemptions or relaxations available to an SMC in respect of any but not all of the Accounting Standards, it shall disclose the standard(s) in r espect of which it has availed the exemption or relaxation. 88 1.3

Accounting for Non-for-Profit Organisations 1.4 If an SMC desires to disclose the information not required to be disclosed pursu ant to the exemptions or relaxations available to the SMCs, it shall disclose th at information in compliance with the relevant accounting standard. The SMC may opt for availing certain exemptions or relaxations from compliance w ith the requirements prescribed in an Accounting Standard, provided that such a partial exemption or relaxation and disclosure shall not be permitted to mislead any person or public. B. Other Instructions Rule 5 of the Companies (Accounting Standards) Rules, 2006, provides as below: 5. An existing company, which was pre viously not a Small and Medium Sized Company (SMC) and subsequently becomes an S MC, shall not qualify for exemption or relaxation in respect of Accounting Stand ards available to an SMC until the company remains an SMC for two consecutive ac counting periods. (3) Applicability of Accounting Standards to Companies (I) Accounting Standards applicable to all companies in their entirety for accounting periods commencing on or after December 7, 2006 AS 1 Disclosures of Accounting Policies AS 2 Valuation of Inventories AS 4 Conti ngencies and Events Occurring After the Balance Sheet Date 89

Accounting for Non-for-Profit Organisations AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accoun ting Policies AS 6 Depreciation Accounting AS 7 Construction Contracts (revised 2002) AS 9 Revenue Recognition AS 10 Accounting for Fixed Assets AS 11 The Effec ts of Changes in Foreign Exchange Rates (revised 2003) AS 12 Accounting for Gove rnment Grants AS 13 Accounting for Investments AS 14 Accounting for Amalgamation s AS 16 Borrowing Costs AS 18 Related Party Disclosures AS 22 Accounting for Tax es on Income AS 24 Discontinuing Operations AS 26 Intangible Assets (II) Exemptions or Relaxations for SMCs as defined in the Notification (A) Accounting Standards not applicable to SMCs in their entirety: AS 3 Cash Flo w Statements AS 17 Segment Reporting 90

Accounting for Non-for-Profit Organisations (B) Accounting Standards not applicable to SMCs since the relevant Regulations r equire compliance with them only by certain Non-SMCs6: (i) (ii) AS 21, Consolida ted Financial Statements AS 23, Accounting for Investments in Associates in Cons olidated Financial Statements AS 27, Financial Reporting of Interests in Joint V entures (to the extent of requirements relating to Consolidated Financial Statem ents) (iii) (C) Accounting Standards in respect of which relaxations from certain requiremen ts have been given to SMCs: (i) Accounting Standard (AS) 15, Employee Benefits ( revised 2005) (a) paragraphs 11 to 16 of the standard to the extent they deal wi th recognition and measurement of shortterm accumulating compensated absences wh ich are non-vesting (i.e., short-term accumulating compensated absences in respe ct of which employees are not entitled to cash payment for unused entitlement on leaving); (b) paragraphs 46 and 139 of the Standard which deal with discounting of amounts that fall due more than 12 months after the balance sheet date; (c) recognition and measurement principles laid down in paragraphs 50 to 116 and pre sentation and disclosure requirements laid down in paragraphs 117 to 123 of the Standard in respect of accounting 6 AS 21, AS 23 and AS 27 (relating to consolidated financial statements) are requi red to be complied with by a company if the company, pursuant to the requirement s of a statute/regulator or voluntarily, prepares and presents consolidated fina ncial statements. 91

Accounting for Non-for-Profit Organisations for defined benefit plans. However, such companies should actuarially determine and provide for the accrued liability in respect of defined benefit plans by usi ng the Projected Unit Credit Method and the discount rate used should be determi ned by reference to market yields at the balance sheet date on government bonds as per paragraph 78 of the Standard. Such companies should disclose actuarial as sumptions as per paragraph 120(l) of the Standard; and (d) recognition and measu rement principles laid down in paragraphs 129 to 131 of the Standard in respect of accounting for other long-term employee benefits. However, such companies sho uld actuarially determine and provide for the accrued liability in respect of ot her long-term employee benefits by using the Projected Unit Credit Method and th e discount rate used should be determined by reference to market yields at the b alance sheet date on government bonds as per paragraph 78 of the Standard. (ii) AS 19, Leases Paragraphs 22 (c), (e) and (f); 25 (a), (b) and (e); 37 (a) and (f ); and 46 (b) and (d) relating to disclosures are not applicable to SMCs. (iii) AS 20, Earnings Per Share Disclosure of diluted earnings per share (both includi ng and excluding extraordinary items) is exempted for SMCs. (iv) AS 28, Impairme nt of Assets SMCs are allowed to measure the value in use' on the basis of reasonab le estimate thereof instead of 92

Accounting for Non-for-Profit Organisations computing the value in use by present value technique. Consequently, if an SMC c hooses to measure the value in use' by not using the present value technique, the r elevant provisions of AS 28, such as discount rate etc., would not be applicable to such an SMC. Further, such an SMC need not disclose the information required by paragraph 121(g) of the Standard. (v) AS 29, Provisions, Contingent Liabilit ies and Contingent Assets Paragraphs 66 and 67 relating to disclosures are not applicable to SMCs. (D) AS 25, Interim Financial Reporting, does not require a company to present interim f inancial report. It is applicable only if a company is required or elects to pre pare and present an interim financial report. Only certain Non-SMCs are required by the concerned regulators to present interim financial results, e.g., quarter ly financial results required by the SEBI. Therefore, the recognition and measur ement requirements contained in this Standard are applicable to those Non-SMCs f or preparation of interim financial results. (4) Applicability of Accounting Standards to Noncorporate Entities (As on 1.4.20 08) (I) Accounting Standards applicable to all Noncorporate Entities in their en tirety (Level I, Level II and Level III) AS 1 Disclosures of Accounting Policies AS 2 Valuation of Inventories AS 4 Conti ngencies and Events Occurring After the Balance Sheet Date 93

Accounting for Non-for-Profit Organisations AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accoun ting Policies AS 6 Depreciation Accounting AS 7 Construction Contracts (revised 2002) AS 9 Revenue Recognition AS 10 Accounting for Fixed Assets AS 11 The Effec ts of Changes in Foreign Exchange Rates (revised 2003) AS 12 Accounting for Gove rnment Grants AS 13 Accounting for Investments AS 14 Accounting for Amalgamation s AS 16 Borrowing Costs AS 22 Accounting for Taxes on Income AS 26 Intangible As sets (II) Exemptions or Relaxations for Non-corporate Entities falling in Level II an d Level III (SMEs) (A) Accounting Standards not applicable to Non-corporate Entities falling in Lev el II in their entirety: AS 3 Cash Flow Statements AS 17 Segment Reporting 94

Accounting for Non-for-Profit Organisations (B) Accounting Standards not applicable to Non-corporate Entities falling in Lev el III in their entirety: AS 3 Cash Flow Statements AS 17 Segment Reporting AS 1 8 Related Party Disclosures AS 24 Discontinuing Operations (C) Accounting Standa rds not applicable to all Non-corporate Entities since the relevant Regulators r equire compliance with them only by certain Level I entities:7 AS 21, Consolidat ed Financial Statements AS 23, Accounting for Investments in Associates in Conso lidated Financial Statements AS 27, Financial Reporting of Interests in Joint Ve ntures (to the extent of requirements relating to Consolidated Financial Stateme nts) (D) Accounting Standards in respect of which relaxations from certain requi rements have been given to Non-corporate Entities falling in Level II and Level III (SMEs): (a) Accounting Standard (AS) 15, Employee Benefits (revised 2005) (1 ) Level II and Level III Non-corporate entities whose average number of persons employed during the year is 50 or more are exempted from the applicability of th e following paragraphs: 7 AS 21, AS 23 and AS 27 (to the extent these standards relate to preparation of c onsolidated financial statements) are required to be complied with by a noncorpo rate entity if the non-corporate entity, pursuant to the requirements of a statu te/regulator or voluntarily, prepares and presents consolidated financial statem ents. 95

Accounting for Non-for-Profit Organisations (a) paragraphs 11 to 16 of the standard to the extent they deal with recognition and measurement of shortterm accumulating compensated absences which are non-ve sting (i.e., short-term accumulating compensated absences in respect of which em ployees are not entitled to cash payment for unused entitlement on leaving); (b) paragraphs 46 and 139 of the Standard which deal with discounting of amounts th at fall due more than 12 months after the balance sheet date; (c) recognition an d measurement principles laid down in paragraphs 50 to 116 and presentation and disclosure requirements laid down in paragraphs 117 to 123 of the Standard in re spect of accounting for defined benefit plans. However, such entities should act uarially determine and provide for the accrued liability in respect of defined b enefit plans by using the Projected Unit Credit Method and the discount rate use d should be determined by reference to market yields at the balance sheet date o n government bonds as per paragraph 78 of the Standard. Such entities should dis close actuarial assumptions as per paragraph 120(l) of the Standard; and (d) rec ognition and measurement principles laid down in paragraphs 129 to 131 of the St andard in respect of accounting for other long-term employee benefits. However, such entities should actuarially determine and provide for the accrued liability in respect of other long-term employee benefits by using the Projected Unit Cre dit Method and the discount rate used should be determined by reference to marke t yields at the balance sheet date on government bonds as per paragraph 78 of th e Standard. 96

Accounting for Non-for-Profit Organisations (2) Level II and Level III Non-corporate entities whose average number of persons em ployed during the year is less than 50 are exempted from the applicability of th e following paragraphs: (a) paragraphs 11 to 16 of the standard to the extent th ey deal with recognition and measurement of shortterm accumulating compensated a bsences which are non-vesting (i.e., short-term accumulating compensated absence s in respect of which employees are not entitled to cash payment for unused enti tlement on leaving); (b) paragraphs 46 and 139 of the Standard which deal with d iscounting of amounts that fall due more than 12 months after the balance sheet date; (c) recognition and measurement principles laid down in paragraphs 50 to 1 16 and presentation and disclosure requirements laid down in paragraphs 117 to 1 23 of the Standard in respect of accounting for defined benefit plans. However, such entities may calculate and account for the accrued liability under the defi ned benefit plans by reference to some other rational method, e.g., a method bas ed on the assumption that such benefits are payable to all employees at the end of the accounting year; and (d) recognition and measurement principles laid down in paragraphs 129 to 131 of the Standard in respect of accounting for other lon g-term employee benefits. Such entities may calculate and account for the accrue d liability under the other long-term employee benefits by reference to some oth er rational method, e.g., a method based on the assumption that such benefits ar e payable to all employees at the end of the accounting year. 97

Accounting for Non-for-Profit Organisations (ii) AS 19, Leases Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e); 37 (a) and (f) ; and 46 (b) and (d) relating to disclosures are not applicable to non-corporate entities falling in Level II. Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e ); 37 (a), (f) and (g); and 46 (b), (d) and (e) relating to disclosures are not applicable to Level III entities. (iii) AS 20, Earnings Per Share Diluted earnings per share (both including and excludi ng extraordinary items) is not required to be disclosed by non-corporate entitie s falling in Level II and Level III and information required by paragraph 48(ii) of AS 20 is not required to be disclosed by Level III entities if this standard is applicable to these entities. (iv) AS 28, Impairment of Assets Non-corporate entities falling in Level II and Level III are allowed to measure the value in use' on the basis of reasonable estimate t hereof instead of computing the value in use by present value technique. Consequ ently, if a non-corporate entity falling in Level II or Level III chooses to mea sure the value in use' by not using the present value technique, the relevant provi sions of AS 28, such as discount rate etc., would not be applicable to such an e ntity. Further, such an entity need not disclose the information required by par agraph 121(g) of the Standard. (v) AS 29, Provisions, Contingent Liabilities and Contingent Assets Paragraphs 66 an d 67 relating to disclosures are not applicable to non-corporate entities fallin g in Level II and Level III. 98

Accounting for Non-for-Profit Organisations (E) AS 25, Interim Financial Reporting, does not require a noncorporate entity t o present interim financial report. It is applicable only if a non-corporate ent ity is required or elects to prepare and present an interim financial report. On ly certain Level I noncorporate entities are required by the concerned regulator s to present interim financial results, e.g., quarterly financial results requir ed by the SEBI. Therefore, the recognition and measurement requirements containe d in this Standard are applicable to those Level I non-corporate entities for pr eparation of interim financial results. 99